By Susan Pulliam
Staff Reporter of The Wall Street Journal
Main Street may be cheering this year's sudden surge in sales of
personal computers priced below $1,000. But Wall Street, so far, has
only applauded politely.
What gives? Any time prices start falling, investors get ready to run
for the exits because profit margins usually start falling as well. But
in the case of personal computers, some investors and analysts believe
lower prices could actually be good news for some technology shares.
The silver lining they see is that the lower prices will expand the
market for PCs enough to offset the lower profits on each machine. Until
just recently, the percentage of U.S. households that own a computer has
been holding steady at around 40%. Now some analysts say that figure
could grow to 60% over the next several years.
The impact of the $999 PC, known on Wall Street as "sub-zeros" after
the fancy refrigerators, seems likely to vary widely among the biggest
high-tech stocks.
Microsoft, for one, shapes up as a beneficiary because it receives a
flat $45 for each computer sold, no matter how low-priced, using its
industry-standard operating system. Ditto Compaq Computer, first on the
scene with a powerful $999 machine, which it began selling last February
and which helped boost its unit sales growth in the third quarter by
54%.
Intel, on the other hand, which has been trying to hold the line on
microprocessor prices, could lose big, at least temporarily. Instead of
Intel's well-known brand, most of the less expensive models contain
cheaper chips from its rivals Advanced Micro Devices and National
Semiconductor's Cyrix unit.
"In the long run, I believe this is good for everyone. I even think
it's neutral for Intel. But it's going to cause chaos in the market for
technology shares, certainly among investors who have to reassess the
implications for the industry," says Drew Peck, an Intel analyst with
Cowen & Co.
The cheaper personal-computer models may have hit the shelves earlier
this year, but Wall Street began taking a harder look last week when
their explosion in popularity became obvious. On Tuesday, Intel reported
third-quarter results that fell short of Wall Street's estimates, as a
result of price competition brought on by the cheaper machines. Since
then its shares have slid from around 91 to Wednesday's close of 83
15/16, down 1 3/16.
Two days later, Compaq reported that its third-quarter unit sales
jumped 54%, in part because of soaring sales of its $999 Presario 4505.
Its shares got hit because of overall nervousness and a run-up in the
stock before its earnings were released. But since then, its shares have
managed to hold steady.
If sales so far this year continue at the same pace, about five
million of the new cheaper models will be sold by year end, according to
estimates by ABN Amro analyst, David Wu. That would be about 40% of the
U.S. retail computer market units.
No technology company is set to take advantage of the new trend like
Compaq. "Of all the PC companies selling these machines, Compaq has the
strongest momentum. They have been aggressive on pricing and advertising
and they argue their margins are OK," says Hambrecht & Quist analyst
Todd Bakar.
Another obvious beneficiary of all these new low-priced PCs could be
Internet stocks -- assuming more PCs equals more net surfing -- such as
America Online, Yahoo! and Excite, says one high-tech mutual fund
manager. Modem companies such as the U.S. Robotics unit of 3Com may also
be helped.
But don't rush out to buy any high-tech stock based on the $999
trend, alone, analysts caution. Morgan Stanley's Mary Meeker said last
week in a note to clients that business couldn't get much better for
Compaq. But she concedes she is "flinching" in her conviction about her
"outperform" rating on Compaq because its shares are up 150% so far this
year. What's more, she says, Compaq had to turn up unit sales growth of
56% to turn out revenue growth of only 31%.
Some investors are waiting for the dust to settle before they make
any bets on the cheap PC market. Lots of people think PC prices will
have to fall really low -- to $300 or so -- before penetration into U.S.
homes will really take off. At those prices, analysts say, no computer
maker would win. And if the cheaper models spread to the U.S. corporate
market, some say the industry's profits could really tumble.
Others, however, see at least short-term benefits. "Clearly, this is
coming on stronger than people expected," says Ed Petner of Lynch &
Mayer. "I think it will lead to a great Christmas for some tech
companies," he says, including Microsoft.
One surprising aspect of the $999 trend is that only Compaq seems to
have anticipated the demand. International Business Machines doesn't
even have a model, and last week said it will restructure its PC
division to respond to the trend.
"IBM, at least initially, missed this wave and they are rethinking
their strat egy," says Hambrecht & Quist's Mr. Bakar. Dell Computer and
Gateway 2000 also have yet to respond. Even Hewlett Packard, which has
usually excelled in the low end of the market, has been slow out of the
gate, just recently launching its sub-$1,000 product in recent weeks.
To be sure, personal computers below $1,000 existed before, in a
price range Packard Bell dominated. What has changed, however, is that
Compaq's Presario model is a better quality, more powerful machine than
earlier cheap models. "At $999 you can get a decent computer now. At
$1,500 you get a really good box," says ABN Amro's Mr. Wu.
Sales have been strong for PC vendors such as Gateway 2000 in the
$1,000-to-$2,000 range for a while. But the emergence of the
under-$1,000 market signals a changing trade-off between higher prices
and extra processing power.
Though most component prices have been falling for years, computer
prices had stayed relatively steady, partly because Intel has kept
rolling out new microprocessor generations whose extra power helped
justify prices $2,000 and above.
But that seems to have changed with Intel's Pentium II, says Cowen's
Mr. Peck. While Pentium II costs vendors $500 or more, Cyrix has a chip
powerful enough to make most users, such as net surfers, happy for $79.
"The performance for Pentium II isn't dramatically higher than for
Pentium," Mr. Peck says.
Other suppliers could feel the pinch of the $999 market as well,
analysts say, such as disk drive makers such as Seagate Technology and
Western Digital.
But few companies that look like big losers will sit still and let
the $999 market get away. "If Intel planned to sit on its hands,
National Semiconductor and AMD would make out great. But Intel has sent
lots of signs that it won't sit on its hands." In that event, he says,
Intel will prevail. |
