Shares in major PC manufacturers tumbled Thursday amid fears over reduced profits ahead spurred on by a bearish report on the industry from investment bank Merrill Lynch & Co. Dell Computer Corp fell $2 to $40.25, while Gateway Inc slipped $0.75 to $82.50 and Hewlett-Packard Co plunged $6.3125 to close at $103.625. Compaq Computer Corp’s already depressed shares dipped $0.1875 to $22.75 and Micron Electronics Inc declined $0.5313 to $9.5625 The overall investor retreat from hardware vendors came on the same day that Merrill Lynch analyst Steve Fortuna said the PC industry was under siege.
Fortuna’s report warned that the influx of low-cost and super low-cost PCs over the next couple of years could have an overwhelmingly depressive effect on average unit prices. Merrill expects AUPs to drop roughly 11.5% this year and more than 12% next year. Declines of about 11% and 10% are projected for 2001 and 2002, respectively. Moreover, revenue growth and overall unit sales growth are also expected to plunge in the next couple of years.
Fortuna initiated coverage of Dell, Gateway and Micron, giving all three companies a near-term neutral rating. Discussing Dell, the analyst said the shares are trading at a rich valuation of 53 times forward fourth-quarter earnings estimates and warned that, despite its superior positioning we believe the stock’s valuation could fall victim to the difficult times ahead for the industry. For Micron, Fortuna noted that its growth opportunity is limited to the commercial mid-market segment and added that the company faces a series of challenges which we believe could prove insurmountable. As for Gateway, at this juncture, we consider the stock’s risk-reward profile to be unattractive, he said.
