>>>Off Topic<<< CPQ business model is doing great, according to article.
Does this article have any significance to disk drive thread?
CASE1-If box makers like CPQ are doing great, doesn't the trickle-down theory of economics mean that component makers will benefit as well?
CASE2-Or is a better theory, Darwin's natural selection, where the strong grow stronger, and the weak are eaten?
(If I'm not that accurate or precise with these theories, it doesn't matter that much. I'm trying to get the general idea, even if I'm off by a light-year or two.)
fnews.yahoo.com
>>>>>>>>>>>>>>>
THE ONLINE INVESTOR - Nov 12 11:08pm
Stock of the Day (Archive)
Nov 12, 1997
The Top Boxmaker Aims Low...and Scores
How can a company make money selling PCs for less than $1,000? Surely their profit margins are
taking a hit, right? Apparently that's not true for Compaq, which is already the leading maker of PCs
and the dominant force in a hot new market for sub-$1,000 machines. Compaq is actually wringing
more profit out of these cheap boxes than many of its higher-priced products.
The market is littered with wounded tech stocks these days, hammered by brutal price pressures in
everything from disk drives to chips. All those lower prices mean cheaper components for Compaq
(NYSE:CPQ - news) , though, and it has been one of the most successful at passing along savings
without hurting its own profit margins. In the process of slashing prices on their computers and
introducing the sub-$1,000 PC in late-June, Compaq has grabbed an even larger lead in the market
for PCs. According to the latest figures for the third quarter, Compaq is pulling away from the pack
with a global market share of 14.2% compared to 10.8% a year ago. Compaq's U.S. market share
grew to 18.8%.
One of the driving forces behind Compaq's advance was the sub-$1000 line of products. Compaq
had an astonishing 71% of all sub-$1000 sales in the third quarter. The Presario line combines
powerful performance and a respected brand with such a low price point that first time buyers can't
seem to resist. Sales of the cheaper machines have greatly exceeded the expectations of industry
experts, not to mention competitors such as IBM (NYSE:IBM - news) which no doubt regret their
decision to wait and see how this new low-end segment would fare.
Most analysts felt it was only a question of timing for this market segment to blossom, and now that
it has, it presents one of the best growth opportunities in the industry. Simply put, it drastically lowers
the financial and psychological barrier for consumers to get wired. The hope is that it will help the
industry penetrate the estimated 60% of U.S. households which don't yet have a PC. The
approaching holiday season will be a good test of just how much the sub-$1000 PC has changed
the consumer PC market, but early reports are encouraging. A nagging concern, though, is whether
the cheap PCs will simply cannibalize sales of the pricier models.
Another key factor in Compaq's growing lead in the industry was an assault on the laptop market.
Going from 5% of the laptop market a year ago to nearly 30% now, the story is pretty well told.
Here, too, Compaq broadened its product line to include lower-priced laptops, and that combined
with aggressive marketing toppled long-time leader Toshiba in the process.
Switching to the other end of the computing market, Compaq's acquisition of Tandem this year not
only brought in high-end technology but expanded access to high-end customers. Compaq recently
surpassed Digital (NYSE:DEC - news) as number three in servers, the pricey machines that run
networks of PCs.
Finally, Compaq is expanding distribution beyond the traditional retail channels and implementing a
direct business model in an effort to capture the enormous success of Dell (Nasdaq:DELL - news)
and other direct sellers. The main appeal of build-to-order machines sold directly through mail or
online channels is faster inventory turns, but it may also provide a nice complement to Compaq's
existing strengths. First time buyers are often more comfortable buying in a traditional retail setting,
while repeat buyers like the convenience of the direct-purchase method.
There is some concern that Compaq will alienate its retail distributors by selling directly to the
consumer, though many retailers including CompUSA (NYSE:CPU - news) are adding their own
online or mail-order distribution channels.
Another, ever-present concern for PC stocks is that the tremendous boom in demand will falter. The
abrupt and severe reaction to the Asian crisis reflects how sensitive the investment community is on
this issue. Many analysts insist the potential impact from weakness in Southeast Asia is overblown,
but with the weakness spreading to Latin America and the sluggishness in Europe dragging on, it's an
issue that may take some time to overcome.
The effect on Compaq's stock price has been substantial, down over 20% in just the past few
weeks. Ironically, the stock seemed to peak just when Compaq posted impressive third quarter
earnings that beat all but the most aggressive expectations, and despite most analysts raising their
earnings estimates for 1997 and 1998 shortly there after. The First Call consensus has Compaq
earning $2.68 this year, a 44% increase, and $3.40 for 1998, a 27% gain. With the recent stock
pullback and rising earnings outlook, Compaq is now trading at 22.9 times 1997 earnings and 18
times 1998 earnings.
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General note: If you think this article is a waste of time, or doesn't belong on this thread, or that I'm posting too much junk on this thread, please feel free to say so. If enough people complain, I will try to cut down on my postings. But I really am trying to contribute something.
-LK |
