PC Stocks Rattled by Talk That Prices May Fall
Shares of major personal computer makers tumbled after a Merrill Lynch analyst warned Thursday that the new prevalence of free and cheap machines could depress prices in the PC business for the foreseeable future.
Dell Computer Corp. dropped $2, or 4.7%, to $40.25 on Nasdaq. Rival Gateway Inc. fell 75 cents to $82.50, while Hewlett-Packard Co. plunged $6.31 to $103.06, both on the New York Stock Exchange.
Merrill Lynch’s Steve Fortuna predicted drops in the average unit price of PCs as well as a slowdown in sales growth. “The influx of low-cost and super-low-cost PCs in the next couple of years could have an overwhelmingly depressive effect on average unit prices,” he wrote.
The likes of Dell, Gateway and Hewlett-Packard are being challenged by upstarts such as Free-PC Inc., which are offering free systems to people willing to look at on-screen advertisements that can’t be deleted.
This wave of offerings has spurred PC sales generally: The number of computers sold grew by 35% in June, according to a recent survey by PC Data, a computer research group. The survey measures only sales in retail stores--about 60% of home computer sales. The rest come from direct, mail-order sales, of which Dell is the market leader, followed closely by Gateway.
Nearly 50% of U.S. homes own personal computers, according to recent market research. The advent of free PCs is beginning to open the PC universe to lower-income users who would rather do without a computer than pay for one.
At the same time, Americans who buy computers are opting for lower-cost ones. The average cost of an Intel and Windows-equipped system is now $890 (not including rebates), down 20% from last year, according to PC Data.
Not all analysts share Fortuna’s fear of price pressure. Dell and Gateway have prospered despite pricing pressure for some time now, said Stephen Baker, PC Data’s director of hardware analysis. He added that the core market for free PCs is distinct from Dell and Gateway’s. Corporate sales and servers, for instance, which make up significant portions of their revenue, are essentially invulnerable to the free PC phenomenon, Baker said.
“We’ve seen panic hit this sector before on pricing,” said Megan Graham-Hackett, a personal computer analyst for Standard & Poor’s in New York.
In fact, she said profit margins have hung in well, and there’s no reason to believe this wave of free PCs will be any different from the groundswell of sub-$1,000 computers that hit the industry last year.
“Yes, it’s tough to make money in this business,” Hackett said. “But we’ve been there before and survived.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
PC Sector Under Fire
Stocks of personal computer makers fell Thursday after Merrill Lynch issud a glum report on the sector. How the top five PC makers (listed in order of market share) fared:
Market Share
Dell: 16.4%
Gateway: 8.4%
IBM: 8.4%
Hewlett-Packard: 8.2%
Other: 41.8%
*--*
Company Ticker Thursday’s close/change 52 week high Compaq CPQ $22.75, -0.19 $49.25 Dell DELL 40.25, -$2.00 54.31 Gateway GTW 82.50, -0.75 83.25 IBM IBM 121.13, -2.19 137.88 Hewlett-Packard HWP 103.06, -6.31 116.25
Company 52 week low Compaq $21.19 Dell 24.19 Gateway 41.50 IBM 56.31 Hewlett-Packard 48.56
*--*
Sources: Bloomberg News, Dataquest
