Patrick, LSI fans, strong buy on LSI in this article, from the AMAT thread via the Intel thread, some of my opinions on PC sales (Y2K).
Jim, Intel investors, article I borrowed (lifted), from over on the AMAT thread. Dan Niles and
another guy talk PC sales, and get into the Y2K effect on PC purchases this year. Niles has the
same "prediction" I've expressed here, that the US is well ahead of the rest of the world in
computer purchases for Y2K remediation, and maybe will be finished by mid-year to Q3. He
goes on to say that the rest of the world, however, (and, to me, "slower" companies and
government agencies in this country) will be late and have to continue hardware buying for Y2K
remediation all through the year. In fact, knowing how some people, companies and countries
work, there will be many still "fixing it" next year. So, I think the net effect will be higher level
of hardware purchasing all this year (as does Niles).
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Panelist
Dan Niles, Senior Technology Analyst at BancBoston Robertson
Stephens
Art Russell, Technology Analyst at Edward Jones
Q&A
Briefing: Has the recent sell-off in PC stocks been overdone?
What are some of the contributing factors that have led you to your
conclusion?
Dan Niles: I do think that the sell-off in PC stocks has been
overdone and I will discuss some of the events that have
contributed to the overreaction. Following Dell's (DELL ) recent
disappointing results,Compaq (CPQ) announced during the last
week of February that its sales of PCs had been soft for the first six
weeks of Q1:99 with orders picking up in mid February. That,
coupled with DRAM pricing weakness, has led to the question: "Is
this the beginning of a cyclical downturn, or is it just seasonal?"
We believe the PC industry is seeing normal seasonality versus
cyclicality (with some market share shifts) and that true demand
slowed in front of the PIII rollout with expectations being reset to
more achievable levels. Expectations have gone from unduly
pessimistic (June 98) to unduly positive (January 99) and are now
headed back to the overly negative camp. There were many
theories exiting Q4 that Q1 could see flat sequential PC unit
demand. Our belief is that the PIII, like every other major product
transition before it, is having the same effect - demand is slowing
down in front of the transition. The good news is that demand
should start to pickup over the following month. Also in Q1:98 and
Q1:97, we exited the prior year with excess channel inventory. We
entered Q1:99 with inventory levels the best in two years.
Though Asia as a whole is somewhat improving, the issues in
Brazil are somewhat dampening the overall recovery expected
abroad. Latin America is definitely an area of concern. As a result,
we view the foreign markets as not providing much upside from a
seasonal Q1 versus original expectations.
In addition, in the PC market we believe that the major players are
closer competitively than they have been over the past year. As a
result we believe market share shifts between the major players
can obscure what is truly happening in the PC market. For
example, in the first half of Q1, we believe that unexpected
weakness at Dell and Compaq is being offset by unexpected
strength at IBM (IBM ) and Gateway (GTW ).
Art Russell: Yes, we do think the sell-off has been overdone as PC
sales in the first quarter are normally weaker than the fourth
quarter. Nonetheless, this is a market that alternates between fear
and greed, and when the former takes root, stocks can fall in a
hurry. Weaker than expected sales to small- and medium-sized
customers and a general delay in purchasing ahead of the release
of Pentium III were the precipitating factors behind the sell-off.
Driving investor fear, however, is uncertainty over whether this is
just a bump in the road or the start of a sustained downturn. In our
view, it is most likely a bump in the road as it is mainly a product
transition issue. February sales are looking better and the fact that
Intel hasn't brought down guidance is an encouraging development.
Briefing: PC makers are broadening their Web-retailing presence
by selling accessories in addition to computers. What does this
shift portend not only for the PC industry, but for the technology
sector in general?
Dan Niles: We think that the fact that the PC makers are
broadening their Web-retailing into accessories is a logical
extension. It makes sense, for instance, that Dell would begin
selling printers, digital cameras, etc in terms of growing top line
reach. It will change the economics of the PC makers business
models and it will also change the competitive landscape, making
brand name reputation increasingly important as competition
increases.
Art Russell: The success of AOL and Yahoo! has awakened the PC
makers who are beginning to realize that a lot of eyeballs hit portal
spaces; and given the decline in average selling prices for PCs, the
move into becoming portal players will allow them new ways to
generate revenue and gross profit margins. Gateway has been a
pioneer in this approach, but Dell and Compaq (CPQ) are quickly
getting on board with this strategy. The main benefits are that they
will develop a recurring revenue stream, they will maximize the
revenue they generate per customer as they will be able to provide
more upgrade options at the time of sale, and they will be able to
steer customers toward their private-branded web-sites, thereby
generating ad revenue and e-commerce fees. This shift into
Web-retailing will eliminate the smaller players as economies of
scale will favor bigger players. Therefore, we are likely to see
increased consolidation activity in the technology sector.
Briefing: What is your view of the Y2K issue and the residual
effect it has had - and will have - on the PC makers?
Dan Niles: Y2K has been positive for the PC makers. Spending
has increased so that consumers are certain that they are compliant.
But human nature is to put off today what can be done tomorrow. I
haven't talked to any IT managers that feel they are where they
want to be with regard to Y2K. I think that the positive effects of
Y2K will continue throughout this year and that spending will not
fall off in Q2 as some have suggested. The US is ahead of Europe
on this issue, so we will probably see increased spending out of
Europe.
Art Russell: The Y2K issue has been somewhat confusing as
executives at Intel, Dell, Compaq, and the like have all said that
Y2K will be a net positive through the first half of the year, and
right out of the gate, PC makers are showing slower sales. Overall,
though, the Y2K issue has had a positive effect on the PC makers
as corporate customers have been upgrading their systems. What's
important to remember is that the corporate market buys roughly
80% of new PCs, and that they're not going to make all of their
purchases in one weekend. That said, many companies are still not
where they want to be with respect to Y2K so PC makers are
likely to continue to benefit from Y2K spending as the year
progresses.
Briefing: Which stocks are you recommending and/or avoiding?
Dan Niles: I have a STRONG BUY on Intel (INTC), Micron
(MU), Texas Instruments (TXN), LSI Logic (LSI), and Compaq
(CPQ).
Art Russell: Our two favorites are Compaq (CPQ) and Gateway
(GTW). We have a STRONG BUY rating on the former and a
BUY rating on the latter. The selling in Compaq has been
dramatically overdone, and if you're a long-term investor, now is
the time to step up to purchase an attractively-valued stock. We
also have BUY ratings on Dell (DELL) and Hewlett-Packard
(HWP). Dell is a long-term core holding, but its lofty valuation
presents a near-term risk in light of concerns over slowing revenue
growth. If you own the stock, and are a long-term investor, we
would suggest a dollar-cost-average approach.
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