Analysts: PC Market is Fine Despite Market Beating

One day after Apple Computer Corp. said its fourth quarter earnings will
be substantially below expectations due to weaker sales in the
past month, the stock market took its toll on the PC industry with a

Upon opening, Apple shares traded down $25.25, or 47 percent, at 28.25, and dipped even further by midday, dropping nearly 52 percent. While the education-friendly PC maker absorbed the biggest hit, rivals saw losses, too. Dell Computer Corp. slid $1.44 to $32,
Compaq Computer Corp. moved $1.66 below Thursday’s close to
$29.01 and Gateway was $6.90 below its close at $49.

Apple said it expects to report revenues between $1.85 and $1.90 billion and
earnings per diluted share, excluding investment gains, between $.30 and
$.33 when actual results are announced on October 18. The giant had hoped to
earn $165 million, but said $110 million was the realistic figure to date.

But does that mean the market should have reacted as negatively as it did?

Gartner Group analyst Martin Reynolds didn’t think so. Reynolds said the
changes in the market valuations don’t make sense. While investors are
rushing out to dump stock, he said, others would do well buying.

“We’ve reached a saturation point,” Reynolds said. “And, of course the PC
makers overestimate their growth. They used to grow 40 percent, but now it
is closer to 10 to 15 percent growth because of the increase in

Reynolds said that while the PC growth in the U.S. is still strong, growth
in Europe has lagged due to increase in gas and oil prices and other shifts
in the economy.

“The PC market remains fundamentally healthy,” Reynolds said. “The problem
is that the growth is not insane.”

Apple’s Chief Financial Officer Fred Anderson said slower-than-expected
sales in September, lower education sales, and sales of its
Power Mac G4 Cube were the three main factors that contributed to the fiscal
shortcomings. Anderson said the letdown has forced Apple to reevaluate its
strategy for the next quarter.

The G4 Cube is one of the smallest fully functional computers available,
measuring about 8 inches square and 10 inches high in an
enclosure of clear plastic. It is touted for its stylish appearance, but
reports have surfaced that it may not be too sturdy.

Calling the news a “speedbump,” Chief Executive Officer Steve Jobs said he
is positive his firm’s future products, including the Mac OS X, will result
in a turnaround.

Yankee Group analyst Eric Klein agreed with Jobs’ assessment.

“Apple does have a market unto itself,” Klein said. “They are very
consumer-focused. They need to start going for the business market.”

Klein said component shortages have contributed to weaker sales and that the
Cube, which he said was akin to a “boutique,” is a fancy product, but its
expandability is limited. Klein also said what Apple is doing is very solid
and that the lower sales figure represents a slowdown in PC demands — not a
weakness on the firm’s part.

What is interesting is that while Apple reported a shortfall, Compaq senior
vice president of consumer products Michael Larson said earlier this week
there was no evidence that a slowdown would occur in the PC industry. Larson
also said a weak PC market may have come from factors such as slow adoption
of the Windows 2000 operating system for corporate customers.

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