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To: Travis who wrote (16019)	7/28/1998 11:25:00 PM
From: soup	Read Replies (1) \| Respond to of 213182

Mocking Gateway. by Rodger Rafter cribbed from Yahoo! AAPL >As part of my continuing series exposing the competition... Gateway is up 6.05% this week, while AAPL is down 3.06%, so I figure it's a good time to make fun of the little boxmaker on the prarie. Gateway has done very well this year because people think it's another Dell. Everytime Dell goes up, GTW seems to rise with it. GTW now even has a higher P/E than Dell's, about 72 vs. 67. They both make cheap computers and supposedly sell them by a supposedly "direct" model, but that's where the comparison ends. Gateway hasn't been able to fake earnings growth nearly as well as Dell. The last 6 quarters for Gateway have been pretty sporatic: .43, .36, -.08, .59, .49, .38 (with a one time 60 cent charge thrown in during Q3 '97). Compare that to Dell's claims of .27, .29, .34, .40, .44 & a projected .46 for this quarter. Dell knows all the earnings tricks and always makes sure they beat estimates by at least 2 cents. Gateway, however, has missed estimates 3 of the past five quarters. Perhaps honesty has held back GTW's revenue growth the past two years, which is nowhere near that of Dell's (35% and 24% for GTW vs. 47% and 58% for Dell). This illusion of phenomenal success has bred more success for Dell, as glamour has led to increasing sales. Gateway's country image doesn't seem to cut it outside of the homes on the prarie. Corporate sales have never been their strength, and they lost over $21 Million on their international operations last year. On the positive side, they've gradually accumulated over $20 Million in in foreign deferred tax assets. If they ever do start making money internationally, these will come in handy. Gateway just doesn't have the guts to be another Dell. Sure, they're mortgaging their furture like Dell, but they are doing it in a half hearted sort of way. While Dell blew the vast majority of their earnings on stock buybacks, GTW allowed book value to grow at an unacceptible rate. Dell's book value grew a total of 24.7% over the last 2 fiscal years, while Gateway's rose 75%. Meanwhile, Dell's stock price soared somewhere around 1300% for an irrational exuberance ratio of about 50. Gateway's rise was a little over 200%, so they only rose about three times what sensibility would dictate. Gateway spent around $30 million in 1996 on stock buybacks and their stock rose about 3-fold, mainly because of the increased demand the buybacks created. They didn't spend anything on buybacks in 1997 and the stock ended year pretty flat. Dell spent over $1.5 billion during this time, and you already know how much their share prices rose. From a shortsighted perspective, Gateway spends far too much on Research and Development. They are probably embarrased about this because they mix it in with S,G & A on their reports. Still, we can deduce that they probably wasted over $150, that could have gone towards inflating EPS. Using Dell as the standard for creating short term shareholder value, 1.6% of revenues should be the goal for R&D spending. Last year Dell had combined operating expendatures equal to 11.4%, while GTW came in at 12.5%. I estimate that GTW R&D was about .6% too high, resulting in $37.7 million in wasted earnings. 2.2% R & D isn't enough for a long term oriented company and it's too little for a short-term oriented company. Since Wintel technology is rapidly becoming obsolete, GTW should focus totally on short-term share holder value. In spite of this, GTW blew over $113 million on in-process R & D type stuff. The made two separate acquistions, but fortunately Gateway says they were just just "one time" charges. Amiga was one of them, and (perhaps realizing their mistake) they quickly cut costs by forcing the newly acquired Amiga division to use soon to be obsolete Intel chips instead of the far more practical PPCs originally planned. GTW is finally showing their improved business sense in other ways, too. The "Yourware:)" program is a cleverly designed scam to rip-off the simple country folk who buy Gateway computers. They also seem to have resumed their stock buyback program, as the stock price has taken off despite declining earnings over the past 3 quarters. Short term prospects are now looking much better for GTW. Rodg. <