Has PC growth hit a wall?

By : |September 30, 2000 0

Eric Auchard

NEW YORK: Financial warnings by stylish computer maker Apple Inc. and chip
powerhouse Intel Corp. have stoked fears that personal computer demand is
slowing, even as the industry enters its busiest season.

While no one piece of data is conclusive, and some bright spots remain, the
growing number and scale of setbacks is creating a momentum of its own that
threatens to spark further dislocations in the closely intertwined industries.

                                 

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On Thursday, Apple issued a sweeping warning, saying business had slowed on
all fronts. The warning followed the one by Intel, which makes the computer
chips used by most of Apple’s rivals. Intel warned a week ago that it was seeing
slack European sales.

More bad news has come from printer maker Lexmark, with trouble in Europe and
its consumer businesses, and SCI Systems, one of the world’s leading contract
manufacturers, which warned of weak PC and consumer electronics businesses.

On Friday, Bear Stearns’ top technology analyst Andy Neff departed from his
normally upbeat stance and cut his rating on all the sector’s top names: not
just Apple, but Compaq, Hewlett-Packard, Gateway and Dell.

“We want to wait for the evidence pointing to stronger demand trends
and/or compelling valuations in order to revisit our rating,” Neff advised
clients in a research note.

Morgan Stanley’s PC analyst raised similar concerns about the macro-economic
environment’s threat to PC demand.

Investors grow gun-shy, fearing new signs of PC weakness
Computer stocks took it on the chin on Friday after Apple’s warning that sales
of educational and consumer products had hit a wall, leading its results for the
September quarter, normally Apple’s strongest, to fall far short of investor
expectations.

Apple stock lost more than 52 per cent of its value to trade at $25.75, as
nearly $10 billion in shareholder value vanished, leaving the company with a
market capitalization of about $9 billion. More than 100 millions shares traded
hands.

Caught in Apple’s wake was Gateway, another PC maker whose business heavily
depends on consumer demand. Its shares tumbled 16 per cent to $46.75. The drop
came amid reports that Apple was looking to open several Apple-branded stores,
seeking to steal a page from Gateway’s successful retail strategy.

Intel lost $2-7/8, or 6.5 per cent, to $41.56. Dell lost $2.625 to trade at
$30.81, down nearly 8 per cent, a new year low. Microsoft touched year-lows
before inching up to trade at $60.25, down $1.06. All trade on the Nasdaq.

Compaq lost $3.09 to $27.58. Micron, the leading US maker of computer memory chips, lost 9.4 per cent to trade at $46, down $4.75, as PC industry woes made the chances of any rebound in world memory product prices less likely. Both trade on the New York Stock Exchange.

Still, many Wall Street analysts were quick to jump to the defence of PC
makers such as Compaq, Gateway and Hewlett-Packard, saying the latest troubles
were Apple-specific and not industry-wide.

Market researcher International Data Corp. forecasts that overall PC
shipments will grow about 17 per cent this year, bolstered by a 19 per cent
growth in the fourth quarter, when traditional holiday-season buying and
expected increases in demand for Microsoft-based business PCs should lift sales.

Continued…

PC makers firm on guidance, but investors losing patience
Several PC makers recently reaffirmed that their outlooks for the current
quarter remain intact. But investors are impatient and many trimmed their
holdings in PC-related stocks as the quarter drew to a close and ahead of next
months’ earnings reports.

A Gateway spokeswoman declined to comment Friday on financial results for its
third quarter ending this week, saying the company has been in a "quiet
period" since Sept. 15. On Sept. 22, Gateway said it was comfortable it
could meet Wall Street’s consensus earnings estimate as of Sept. 15.

Investors remain in suspense about the last two weeks of the quarter,
typically the strongest part of the quarter for back-to-school and government
fiscal year-end sales in the United States.

Compaq chairman Michael Capellas declined to comment on third-quarter results
in an interview with Reuters late on Thursday. Round Rock, Texas-based Dell
holds a bi-annual analyst briefing late next week, which could provide
indications on how it is faring in its quarter ending in late October.

Hewlett’s chairman Carly Fiorina said on Wednesday her company’s quarter
remained "on track." A spokeswoman did not immediately return calls
seeking further comment.

Some analysts argued that Apple is a market unto itself.

"Apple’s miss really points to one of two things," said PaineWebber
analyst Don Young. "One, Apple’s comeback is over. Or, two, there was a
worldwide softening in consumer PC demand in September for all PC vendors,"
he said. "We are casting our vote that this problem is unique to
Apple," he said.

The big problem is that data remains sketchy about PC sales for the month of
September, Young said, although Gateway has reported continued success in its
retail store outlets based on recent sales data.

Salomon Smith Barney analyst Richard Gardner said that potential explanations
for Apple’s worldwide sales slowdown could include a fall in the US and European
consumer spending accelerated by higher oil prices and interest rates, issues
likely to drag down rival PC makers as well.

He also suggested that aggressive pricing by Apple’s competitors had
undermined demand for its new high-priced products, which have met with rave
reviews, but lower than expected sales.

(C) Reuters Limited 2000.

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