FWIW
March 24, 1999
Likelihood of Weak Sales by PC Makers
In 1st Quarter Helps Depress Tech Stocks
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
Personal-computer makers seem destined for a disappointing first quarter, but evidence of a lasting drop in demand remains inconclusive.
Jitters about PC sales contributed to a sharp drop in many technology shares Tuesday. The sell-off was partly triggered by comments from market researcher PC Data Inc., which on Monday said U.S. retail unit sales of PCs in February rose just 1%, while revenues dropped 16%. Later the same day, PC maker Micron Electronics Inc. reported a 24% drop in sales for the fiscal second quarter ended March 4.
Buyers Waiting for New Intel Chip
Some of the revenue slowdown reflects rapid declines in PC prices. Some customers also appear to have held up purchases until they could buy machines based on a new chip from Intel Corp.
A more subtle factor, analysts and industry executives say, is that many investors appeared to be betting that computer spending associated with the year 2000 problem might stimulate PC purchases in the quarter. That now doesn't appear to have happened.
"It's clear that the first calendar quarter has not been as strong as everyone expected it to be," said Joel Kocher, Micron Electronics' chief executive officer. "I would characterize it as squishy."
The demand questions combined with other earnings worries to cause a turbulent day in the stock market. Compaq Computer Corp. shares managed to rise 50 cents to close at $30.625 in New York Stock Exchange composite trading. But other issues dropped. Gateway 2000 Inc. fell $3.75 to $63.8125 on the Big Board; and Dell Computer Corp. slid $2.1875 to $35.6875, Apple Computer Inc. dropped $2.0625 to $33, and Micron fell 37.5 cents to $11.4375, all in Nasdaq Stock Market trading.
Some analysts have been cutting earnings estimates for PC companies. But others say the stock-market reaction mainly reflects overheated assumptions about a Y2K boost.
"There is no indication that the PC market is any worse than a seasonal drop," said David Wu, an analyst at ABN/AMRO in San Francisco. "But relative to daydreaming expectations for investors, the first quarter isn't going to come in strong enough."
World-Wide Trend Is Less Clear
Mark Edelstone, an analyst at Morgan Stanley Dean Witter in San Francisco, added that investors often forget that U.S. retail sales only represent 10% of the world-wide market, an indication that the PC Data numbers aren't a good barometer of the industry's health. He expects Intel, a broader bellwether of PC sales, will likely meet or exceed expectations when it reports its first-quarter results in April.
Ironically, the market jitters coincide with major progress by PC makers in broadening their reach. Odyssey LP, a San Francisco research firm, Tuesday reported that a survey in January found that PCs for the first time are in 50% of U.S. homes, up from 42% for the same month in 1998.
But that penetration was largely driven by the availability of machines priced at less than $1,000. PC Data reported that only 5% of machines sold at retail in February were priced above $1,500. Companies such as eMachines Inc., a start-up in Fremont, Calif., are offering systems at less than $500.
So, as unit sales remain firm, profitability suffers. "They're now experiencing volume growth without proportional revenue or earnings growth," said Nick Donatiello, Odyssey's president. "The chickens are coming home to roost."
Business Market
The corporate market, which accounts for the bulk of PC sales, has slowed somewhat because of questions about new technologies and how to spend money set aside for Y2K projects, said Matt Sargent, an analyst at ZD Market Intelligence in La Jolla, Calif.
Intel, for example, didn't ship its Pentium III microprocessor until late February, causing delays as companies pondered whether to adopt machines based on the chip. Others are pondering whether to upgrade to Microsoft Corp.'s Windows 2000, which has been delayed until at least the end of this year.
March sales have been stronger, particularly for big companies such as Compaq, said William Milton, an analyst at Brown Bros. Harriman in New York.
"We aren't looking at a situation like last year, when there was a lot of excess inventory," Mr. Milton said. "We should see a quarter only slightly weaker than a seasonal average."
ZD's Mr. Sargent estimates that world-wide PC unit sales should still grow about 18% in 1999, better than the 16% growth in 1998. But revenues are expected to grow more slowly because of price erosion, Mr. Sargent said.
Micron's Mr. Kocher said he's hopeful that the market-stalling effect of the Pentium III announcement has faded, though it's too early to call the chip a major hit. "The product is selling well," Mr. Kocher said. "I wouldn't characterize it as a gold rush. My expectation is the demand will grow over time."
|
