Wall Street investors hammered computer maker AST Research Inc. on Thursday, driving down its stock price 27% after the company said it would post a loss for the current quarter.
The Irvine-based company, whose rapid growth has surpassed the industry's pace for the past year, led a general Wall Street disenchantment with computer company stocks as investors fretted over large inventories and steep price cuts that may ultimately reduce their dividends this year.
AST stock fell $4.94 a share to close at $13.06 in Nasdaq trading. About 14.9 million AST shares changed hands, making it the most heavily traded Wall Street issue.
Although other computer makers' shares also declined Thursday, analysts said the problems at AST--an unusual confluence of product delays, parts shortages and atypically lower profit margins--are specific to the company. The entire industry, though, may feel the pressures of recent retail price cuts of 20% to 27% if the discounts fail to generate a boom in sales, analysts said.
"People are very skittish about whether the industry is in good shape or in bad shape," said analyst Richard S. Chu at Cowen & Co. in Boston.
Given that uneasiness, AST's troubles appeared to trigger a general selloff in technology shares, said analyst Philip Rueppel at the brokerage Alex. Brown & Sons in New York.
The AST stock skid was no surprise. The company reported late Wednesday that it expects a loss for its fiscal first quarter, which ends Sept. 30. The severe beating the stock took was not an overreaction, Rueppel said.
Based on AST's own projections, analysts had expected the company to post earnings of between 20 cents and 30 cents a share for the first quarter. Now they anticipate a loss of between 35 cents and 75 cents a share. Revenue, which had been expected to keep up with the latest quarter's total of $585 million, is now likely to be as much as $70 million less, Rueppel said.
The stock's decline took a chunk out of the net worth of AST's biggest shareholder, co-founder and Chairman Safi U. Qureshey, who owns 10.1% of the company's shares. The value of his personal holdings fell $15.9 million. No other individual owns more than 1% of the stock.
Qureshey was in China on Thursday with a Commerce Department delegation and could not be reached for comment.
AST's announcement Wednesday "came out of the blue," said analyst William J. Milton Jr. at Brown Bros. Harriman in New York. He and other analysts had attended a daylong meeting with AST officials Aug. 2 near Dallas, he said, and "there was no hint that this was coming. This all happened in the last 30 days."
Milton said that AST's product delays, reduced prices and increased advertising to sell its older inventory were already beginning to affect the company when Compaq Computer Corp. slashed prices 22% on some models 10 days ago. International Business Machines Corp. and Digital Equipment Corp. followed with reductions of as much as 27%.
AST will have to compete in the latest round of cuts by offering even its new products at lower-than-anticipated prices, said James T. Schraith, AST president.
Given the fierce competition, AST's new-product delays could not have come at a worse time. The company, which already has the lowest profit margin among major computer manufacturers, had expected to bring new laptop and desktop models to market in August, but it is only now shipping them.
When AST's Bravo MS, a desktop model driven by the latest Pentium microprocessor, makes its debut soon, the company will be forced to lower the price. Likewise, AST's new laptop model will probably hit the stores at a less-than-hoped-for price.
The last time the industry resorted to major price cuts to sell a backlog of inventory was in 1992, and that created "significant" increased demand, said David Dukes, co-chairman of Ingram Micro Inc. in Santa Ana, the nation's leading computer distributor.
"That's where we are again," he said. "But this time, (profit) margins are dramatically lower than in '91, and manufacturers can't afford to let this price cut not spur demand. They need to have volume, and I'm optimistic that that's going to happen."
But other observers are less optimistic, and some analysts are downgrading their recommendations on technology stocks. SoundView Financial Group Inc., for instance, recently switched from "buy" recommendations on Compaq and Microsoft Corp. to "hold."
As for AST, its stock probably will likely hover around $13 a share for some time, said James Reynolds, an analyst with Wedbush Morgan Securities in Los Angeles. Much will depend on how aggressive the industrywide cost-cutting becomes, he said.
Schraith said AST expected to be hit hard Thursday. "Any time you disappoint your investors and the financial community, you'll see reactions of this sort," he said.
Both he and analysts say they expect AST to break even in its second fiscal quarter, which begins Oct. 1, and be profitable for the rest of its fiscal year.