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The Cutting Edge

PC Stocks Plunge on Gateway Sales Warning

November 30, 2000|KAREN KAPLAN and JOSEPH MENN | TIMES STAFF WRITERS

Less than one week into the critical holiday shopping season, personal computer makers are reeling from weak sales that already have sent some of their stocks to new 52-week lows.

On Wednesday, Gateway warned Wall Street that sales during the weekend after Thanksgiving were down 30% compared with last year. As a result, the No. 2 direct seller of PCs said its fourth-quarter revenue would be $500 million below previous estimates and total about $2.55 billion, basically flat compared with 1999.

Meanwhile, the top direct PC seller, Dell Computer, tried to jump-start its holiday sales by offering one free year of Internet access through Microsoft's MSN service with the purchase of some new computers.

Investors responded Wednesday by hammering PC stocks. Gateway shares dropped $1.50 to close at a 52-week low of $29.50 on the New York Stock Exchange, then fell as low as $20 in after-hours trading. Dell shares lost 63 cents in Nasdaq trading to close at $21.81, another 52-week low.

Apple Computer also hit a 52-week low Wednesday, closing at $17.56, down 47 cents in Nasdaq trading. Industry leader Compaq Computer fell 40 cents to close at $22.70 on the NYSE, and Hewlett-Packard dipped 13 cents to $34.56 in Nasdaq trading.

Gateway's negative news came just nine days after Chief Financial Officer John Todd offered rosy projections in response to pessimism on Wall Street. Todd had said Gateway was "confident that our sales of PCs--as well as sales of products and services other than the PC, such as training, Internet service, software and peripherals--are ramping at expected levels."

But after seeing the Thanksgiving sales, the company changed its tune. San Diego-based Gateway said Wednesday that its operating income for the fourth quarter would be about 37 cents per share instead of the 62 cents per share analysts had been expecting. For 2001, the company lowered its estimate for full-year earnings per share to $1.89, nearly 20% below the consensus estimate of $2.28.

The company also said it will probably report a net loss of 2 cents per share for the fourth quarter because of an approximately $200-million one-time charge to write down its investments in technology-related companies.

Gateway's warning followed disappointing earnings or lowered projections in the last few weeks at Apple, Dell, Intel and other computer-related companies and a slide in stock prices across the industry.

The other companies cited a variety of factors, but analysts said they all face fundamental problems without easy answers.

One is that computers have grown so smart and fast that the value in upgrading has diminished. Even manufacturers that relied on nifty designs, such as Apple's iMac, have found demand mostly filled.

PC makers also are suffering from their own past mistakes. Internal studies conducted by industry leaders have found that buyers who found it difficult to migrate from their first computer to their second are reluctant to upgrade again, said Rob Enderle, who follows the PC industry for market researcher Giga Information Group.

And then there's the economy, which is showing ever-clearer signs of slowing.

"The decelerating U.S. economy is definitely having an impact," said Wit Soundview analyst Jason Wells in San Francisco.

Gateway executives said the economy was partly to blame for its dramatic sales slowdown. They also said steadily falling PC prices have made consumers less concerned about waiting until the holidays to invest in a new computer, making them less of a seasonal item. At the same time, PCs are becoming so critical to households and businesses that customers increasingly find they can't wait until the end of the year to make their purchases, they said.

But Enderle said Christmas is still important for high-priced items such as computers, other consumer electronics items and even big-ticket items such as home appliances and automobiles.

He said Gateway and its brethren are suffering because consumers simply don't see any reason to buy new computers, and industry leaders aren't spending much money to market their wares this holiday season.

"There's nothing to drive up demand," he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Gateway's Stumble

Personal computer maker Gateway warned Wednesday that it wouldn't be getting its customary Christmas sales boost. That news, combined with warnings from other companies, sent shares of several PC makers to 52-week lows.

*

Gateway stock, monthly closes and latest on NYSE

After-hours trading Wednesday: $20

Source: Bloomberg News

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