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Second-half turnaround for PC sector nowhere in sight
by Michelle Rushlo
July 11, 2001
The second half of 2001 -- the part of the year during which investors were supposed to see improved performance -- has arrived.
Yet, despite hopeful speculation that the worst could soon be behind it, the personal computer business continues to swoon, and many analysts remain skeptical of any quick turnaround.
"Things are, if anything, getting worse," said Brett Miller, an analyst with A.G. Edwards & Sons. "There's a pretty decent amount of pessimism."
Last week, Advanced Micro Devices (AMD) warned it badly missed earnings expectations, citing price pressure from rival Intel (INTC) and weak demand for flash memory. On Tuesday, Compaq Computer (CPQ) said it met earnings-per-share estimates but fell short on revenue.
A number of other personal computer and PC-related companies are scheduled to report quarterly earnings next week, including Intel, Microsoft (MSFT), Gateway (GTW) and Apple (APPL).
"So far, the signs are not so good," said International Data Corp. analyst Roger Kay.
He said the research firm's early June forecasts of a 6.3 percent decline in U.S. computer shipments and worldwide growth of 5.8 percent this year will likely turn out to be optimistic.
Windows XP, Christmas could help
Kay said Microsoft's Windows XP will probably prove a mild stimulus for the computer sector at the end of the year, but the effects will not be dramatic.
"Microsoft is about to spend a huge amount of money advertising this and making it seem like you've got to have it," he said. "That will do something, but I wouldn't expect too much."
And analysts say prior to the release, scheduled for Oct. 25, demand is likely to be even softer.
Miller said buyers who are in the market for a PC will probably wait until after the release, meaning third-quarter sales will, if anything, be slowed further by the pending operating system release.
WitSoundView analyst Mark Specker said it's possible too that after a couple of good school selling seasons, students already have the PCs they want.
Combine that with the wait for Windows, and "it's going to be tough to get people to buy PCs" this fall, he said.
But Specker also said the holiday season is likely to provide some relief. By then, Windows XP will be available, so "there won't be an obvious reason for people to be apathetic."
Stephen Baker, an analyst with industry research firm NPD Intelect, agrees.
He said Microsoft's heavy promotion of Windows XP should drive some demand for new PCs. "You can say people know what they want, but you can make them want things," Baker said.
He also noted PC demand will have been relatively weak for a good 12 to 15 months by then, and at some point, people will seek to upgrade.
The combination of promotion, new product releases and the long period of weak demand will shape a pretty good holiday selling season, Baker said.
"It's not going to be the best holiday season ever because the economy isn't going to be great, and that's going to hold sales down," he said, but it shouldn't be as weak as last year.
Other analysts, like Miller, are more pessimistic about this year's holiday season.
He predicts that -- at best -- unit volume in the United States will be flat with the fourth quarter of last year, meaning a revenue decline of at least 10 percent. He said worldwide sales will likely be slightly better.
Looking for long-term growth
Still, it's clear the U.S. economic slowdown is spreading abroad. Hewlett-Packard (HWP) has already warned of waning sales in Europe and Asia, and Compaq cited Europe as the main cause of its revenue shortfall in the second quarter.
Computer makers have been aggressive about cutting prices in an effort to bolster demand and gain market share, but Miller said he doesn't see it helping much.
"You just don't need it. No matter how compelling the price, it doesn't matter if you don't need it," he said.
He said the relatively high percentage of households with computers signals that PCs have become a mainstream technology, similar to the television. "Computer people don't like to hear that, but you're basically looking at a replacement market."
The applications are no longer outstripping the hardware capabilities and forcing customers to unload their PCs as rapidly, he said.
Still, not all growth opportunities are gone, others says.
While western markets -- which are generally easier to penetrate -- are basically saturated, worldwide growth has not stagnated, Specker said.
Unit growth has slowed into single-digit percentage points, he said, but "as prices continue to fall, the worldwide unit demand for PCs, generally speaking, continues to go up."
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