Gateway Stock Drops After Strategy Swing
Gateway Inc. isn’t in imminent danger of running out of money, but the nation’s fourth-largest personal computer maker is running out of believers.
Its shares fell to near a six-year low Thursday, the day after the Poway, Calif., company said it will do an about-face and again slash PC prices to recoup plunging market share. Only seven weeks ago, Gateway said it was abandoning the low-price strategy to chase big-spending consumers in a bid to return to profitability.
But profit is at least a year away, and Gateway warned that its first-quarter loss will be three times larger than Wall Street had been expecting.
“The revenue and profit slide continues, and until profitable growth returns, we remain on the sidelines,” wrote Lehman Bros. analyst Daniel Niles, one of more than a dozen analysts with neutral ratings on the stock.
Shareholders also weren’t pleased, and they sent Gateway down 10% to $4.60 on the New York Stock Exchange. The shares hit $4.24 in October, their lowest since 1995.
In the span of 12 months, Gateway’s share of the U.S. home desktop market skidded from 15% to 8.8% at the end of 2001, according to researcher IDC. And the company has pulled back from sales overseas, where the possibility of long-term growth is greater.
The renewed price war, which echoes a 2001 promise to match consumer offers by market leader Dell Computer Corp., puts Gateway back on a collision course with Dell.
Most analysts don’t see the point: Dell is bigger, profitable and spends less for each PC sold because it has no store overhead.
“I can almost see Michael Dell smiling like a Cheshire cat in the background,” said IDC analyst Roger Kay.
Indeed, when asked Thursday why Dell has kept gaining share, Dell Vice President John Hamlin said: “Unlike most of our competitors, we don’t change strategy every quarter.”
In an interview, Gateway Chief Financial Officer Joe Burke said the new push to lure customers with bargain prices makes sense because Gateway will then have the chance to sell more profitable related goods and services, including Internet access and training.
“Last year, we made a prediction of profitability in the fourth quarter,” Burke said.
“We got back to profitability, but with a higher-price strategy. We saw that was really not a growth strategy.”
In a way, Gateway is trying to reshape itself as an IBM for consumers. IBM has prospered by offering PCs as a convenience for big-business customers that order the firm’s higher-end machines, integration services and consulting.
Gateway wants to do the same for the little guy, selling PCs along with consulting.
To that end, Burke said, Gateway is beginning to expand its retail offerings beyond computers to digital cameras, hand-held devices and other gadgets.
“The core strategy is still the same, to be an integrator of technology for our customers,” he said.
Gateway’s customer satisfaction figures have improved, analysts said.
Dell is finding tech-support calls more costly as it expands from its base of business customers to the consumer market.
But the reworked pitch to Gateway customers won’t be easy.
The company’s “only hope is to aggressively take share from competitors armed with superior market and product mixes along with greater scale,” wrote Credit Suisse First Boston analyst Kevin McCarthy.
Gateway’s lack of brand power outside the PC will make it that much harder to gain back the lost profit, he wrote.
Burke said Gateway will continue to cut costs. The company has about $1.2 billion in cash, no outstanding bonds and untapped lines of credit that are enough to last a long time.
McCarthy forecast that the company would lose $147 million this year.
Still, Moody’s and Standard & Poor’s list the company’s credit as junk because of long-term concerns about Gateway’s prospects.
Nearly a third of the company is owned by founder Ted Waitt, who returned as chief executive one year ago after the firm’s stock lost three-fourths of its value, from more than $80.
With the company trading near book value, or its assets minus its liabilities, the best way out for shareholders might be a takeover.
But with No. 3 PC maker Hewlett-Packard Co. poised to buy No. 2 Compaq Computer Corp., it’s hard to see who would be interested.
