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The second quarter is rarely a good time for computer makers. Back-to-school buying won't get started in earnest for months, the holidays are half a year away—in both directions—and corporate IT budgets are still far from spent. But there's growing concern that this year's lull is hitting especially hard.
Concerns over the U.S. computer industry surfaced on July 12, as some prominent Wall Street analysts made bearish remarks about Dell (DELL), the world's largest PC maker, and Apple (AAPL), which makes computers and the popular iPod digital music player.
By the end of the trading day, tech stocks had taken a beating, with computer makers some of the biggest losers. Dell shares fell more than 4%, while Apple slumped almost 5%. Hewlett Packard (HPQ) dipped 2.7%.
DEMAND DOWN. While the day's losses were pegged to company-specific issues, some analysts say growth for the entire year will be slower than previously thought. Among the concerns: delays in key computer-related technologies including the latest Microsoft (MSFT) operating system and next-generation DVD players.
Some are concerned price wars are imminent and that economic slowdown could crimp overall demand. "There's a softness in the market that's building," says Richard Shim, a senior research analyst at IDC. In the past two weeks, IDC cut its 2006 forecast for U.S. PC growth to 5.7%, from 6.8%. "In '04 and '05 there was tremendous growth. In a market that's as mature as this industry is, there's no way you can maintain those levels."
Dell fed worries on July 12 by announcing that the following day it would unveil a "major pricing initiative" for U.S. consumers and small businesses. The same day, UBS Investment Research (UBS) said it was cutting earnings estimates for Dell on the belief the company "continues to be impacted by competition and adverse mix shifts within the PC market." Dell's performance in recent quarters (it lost U.S. share to rivals in the first three months of the year) has given investors little reason for confidence—though the company has embarked on a turnaround campaign that includes beefing up customer service (see BW, 6/19/06, "Dell: Facing Up To Past Mistakes").
Credit Suisse (CSR) issued a report the same day that did a number on Apple's stock. The computer maker, which reports fiscal third-quarter results July 19, will probably issue sales and earnings forecasts for the current period that falls short of analysts' expectations, Credit Suisse analyst Robert Semple wrote.
Apple is likely to tell analysts that fourth-quarter sales will be $4.6 billion to $4.8 billion, compared with analysts' estimates for sales of $5 billion, the report says. "We expect Apple will once again use the September quarter to reduce iPod inventories as the company prepares for a refresh of its product lineup."
NEW PRODUCT DELAYS. Apple has been dogged by reports from analysts at other firms that the next version of the popular iPod music player will be delayed. If that's the case, Apple won't be alone in experiencing tech delays. Microsoft has already owned up to delays in Vista, the next version of its operating system, and Office, its package of business-productivity applications. That in turn could affect the timing of PC purchases, say analysts including Wendy Abramowitz, a senior analyst at Argus Research.
Backers of the competing next-generation DVD technologies weren't ready with their wares as early as planned either, notes Shim at IDC.
So how long will the bearish sentiment linger? Shim sees the market "bouncing back in '07." NPD analyst Stephen Baker is even more upbeat. "We continue to be very bullish about the third quarter," he says. Not only will consumers be buying machines for students, but many are upgrading to notebooks and adding second computers for the home, he says.
Holahan is a writer for BusinessWeek.com in New York
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