Shares of personal computer maker Gateway Inc. plunged 25% Tuesday as Wall Street registered disappointment over the company's preview of its fourth-quarter results.
After the market closed the Poway, Calif.-based company got more bad news: Credit-rating firm Moody's Investors Service said it cut Gateway's bond rating to junk status, which could make it more expensive for the company to raise capital.
Before Moody's announcement the stock tumbled $2.56 to $7.69 on the New York Stock Exchange, though it remained well above the multiyear low of $4.24 set in October.
Late Monday Gateway said it would be profitable in the fourth quarter, surprising some analysts. But the company also said sales were about $1.16 billion, less than the $1.39 billion analysts were expecting.
PC unit shipments fell 15% from the third quarter's 818,000 units, instead of rising as Gateway had predicted.
Chief Financial Officer Joe Burke said the company emphasized higher-priced products instead of trying to compete with price cuts by rivals such as Dell Computer Corp. and Compaq Computer Corp., which would have eaten into profit.
"With the focus on profitability during the fourth quarter, we focused on the higher end of the market as opposed to chasing the low end, the $799 PCs," Burke said.
"It would have been nice to have a greater unit volume in the fourth quarter, but it didn't happen," he said. "Still, it speaks a lot that we were able to get back to profitability on fewer unit volumes. There's a positive in there."
But investors hammered the stock on fears that Gateway is losing the heated PC battle to Dell and others, analysts said.
"The larger issue is they are in a very competitive business," said Bear Stearns & Co. analyst Andrew Neff, who noted that Dell and Compaq are showing increases in their PC unit shipments.
Moody's, in cutting the rating on Gateway's debt, said the move reflected concern over whether the second-largest direct seller of personal computers can maintain or increase revenue and market share.
The firm reduced its rating on Gateway's senior unsecured debt to Ba1, or below investment grade, from Baa3. Moody's also said the rating remains under review for further downgrade.
Gateway has about $1.1 billion in cash and $200 million of debt, which is a senior convertible 20-year note issued to AOL Time Warner Inc.'s America Online. The company also has an unused $300-million revolving credit facility maturing in September 2004.