Caution Flags Put New Demands on PC Stock Traders
The news out of Irvine on Tuesday was stunning: Shares of personal computer maker AST Research rocketed $5.50 to $32, or 21%, after the firm said it will report sharply higher sales and earnings in the current quarter.
But up in Silicon Valley, caution flags are flying. In an early December survey of 50 Fortune 500 companies, brokerage Robertson Stephens & Co. found that, on balance, personal computer purchases will drop 17% in 1991 from 1990 levels.
The Robertson survey follows a similar study done in September and October by technology consultants Soundview Financial of Stamford, Conn. The Soundview survey of 72 American companies, from small businesses to major firms, projected a 25% decline in PC purchases next year.
The paradox of the survey results and AST’s current experience may not be as large as it seems. For one thing, fourth-quarter PC sales may benefit from the usual year-end corporate budget blowouts: If there’s any money left in your capital spending budget, you either use it or lose it. But come Jan. 1, it’s a whole new year and a whole new (and undoubtedly tighter) budget.
Beyond that, analysts admit that AST’s products unquestionably are hot right now--while competitors Compaq and IBM have seen their PC sales in the United States flatten in recent months, notes Michael Murphy, editor of the California Technology Stock Letter in San Francisco.
The big question is whether the two PC purchaser studies are a clear sign that AST’s sales, and those of other PC companies, will fall off a cliff early in 1991--taking the stocks with them.
Peter Rogers, PC analyst at Robertson, admits that no survey of 50 computer users can paint a complete picture of demand. But, he says, “it’s the trend that should be paid attention to; it’s a red flag. . . . Almost everywhere you look there is a net deterioration in demand” looking into 1991.
Analysts say PC companies that expect an uninterrupted flow of orders after the new year aren’t being realistic. The recession is bearing down, layoffs are rising and “cost containment” is Priority One at companies large and small. Why assume that PC expenditures will escape the general slashing of capital spending next year?
Although PCs are considered productivity enhancers, analyst Jim Weil at Soundview notes that even productivity-related capital purchases are often delayed or scaled back when companies first begin preparing for an economic slump. It’s the old “shoot first, ask questions later” syndrome: First you freeze spending or lay off workers, then you worry about productivity details.
What’s more, “many large companies now are saturated with PCs,” Weil says. Their next step would be to upgrade to better systems. “But in a tough capital (spending) environment, you don’t have to do it this year,” he says, referring to ’91.
Still, the global PC market has become so huge that there always are suppliers doing well, even if the broad trend is down. For AST, one very strong niche has been the American small- business buyer, says Murphy. “Those people still are buying computers, and they’re buying off-brands” such as AST, Advanced Logic and Dell Computer models, Murphy says.
Overseas demand has also remained red-hot, analysts say, and is likely to stay at least reasonably healthy even if the U.S. economy sinks deep into recession.
For those reasons, Murphy says he’d still be comfortable owning stocks such as AST and its Irvine neighbor, Advanced Logic. “I think it’s a huge mistake being short those guys,” he says. Likewise, Apple Computer’s wildly successful new low-priced PC line almost guarantees “that they’re going to have a great (first) quarter,” Murphy says. That earnings visibility should drive those stocks into 1991, he says.
Robertson’s Rogers, too, is bullish on Apple and Dell, citing their strong acceptance in the home and small-business PC market.
From a value point of view, the stocks aren’t expensive by any means, Murphy points out. AST trades for just eight times analysts’ consensus earnings estimate of $3.82 a share for the year ending next June 30. In contrast, the Standard & Poor’s 500 index of stocks trades for about 14 times estimated 1991 earnings.
Yet, even Murphy admits that by midyear or so, AST, Advanced Logic and other current high flyers probably will begin to see their sales trail off. “It’s reasonable to think that the recession will get to those companies as well by then.”
Soundview’s Weil believes that investors who have made good money in AST and other PC stocks should just “get off the merry-go-round now.” Looking into the jaws of recession and the capital spending cuts that companies already have mandated for 1991, he sees trouble sooner than later for PC stocks. “You better be a damn good trader if you want to play this game” from here on out, he says.
What About Software?If PC makers are headed for a slowdown, does that mean the software suppliers also will suffer? Probably not, analysts agree. Software isn’t a major capital spending decision, and in fact, companies that cut their hardware purchases may then decide to spend a little more than planned on software, especially if a few extra dollars can provide a major enhancement to PC productivity.
“I think we’re going to see a great year (in 1991) for software growth even absent growth in hardware,” says Robertson’s Rogers.
But Murphy cautions that several major court decisions regarding alleged software patent infringement are due soon--and the decisions could wreak havoc with software stocks, he says. For example, he believes that Microsoft will lose its court battle with Apple Computer over the Windows 3.0 program. “That would bring the entire industry to a screaming halt,” because of the time it would take to sort out who really owns what in terms of programs, he says.
Also, Borland International is fighting Lotus Development. Murphy sees Borland losing, which could leave Lotus in a position to hit Borland for a huge cash payment, he says.
Perhaps even more so than with hardware stocks, individual investors who buy software stocks need to be totally fluent in the industry’s complex comings and goings, analysts say. If you don’t understand the business, or you can’t afford a very diversified portfolio of software stocks, this is a good industry to avoid.
PC STOCKS: TIME TO EXIT? How key personal computer hardware and software stocks have fared this year, and the stocks’ price-to-earnings ratios based on estimated 1991 earnings.
52-week Tues. close ’91 Stock high/low and change P-E* Advanced Logic $19 1/4-$4 1/2 $9,+1/4 6 Apple 47 3/4-24 1/4 42 1/4,+2 1/8 10 AST Research 32-9 1/2 32,+5 1/2 8 Compaq 67 7/8-35 1/2 56 1/2,+2 1/8 11 Dell 15 3/8-4 5/8 15 3/8,+ 3/4 10 IBM 123 1/8-93 3/8 113 1/2,+2 11
52-week Tues. close ’91 Stock high/low and change P-E* Ashton-Tate 15 1/8-4 7/8 6 3/8,-- 9 Borland 32-9 5/8 29 1/2,+ 7/8 14 Lotus 39 1/4-12 1/2 19 1/8,-1/8 8 Microsoft 80 3/4-38 1/2 75 1/4,+1 1/4 24 Oracle 28 3/8-4 7/8 7 5/8,-1/8 14 Software Pub. 28-12 20,+ 3/4 8
* Stock price-to-earnings ratio based on analysts’ consensus earnings per share estimate for 1991, from Zacks Investment Research.