2HRS2GO: Intel, Iomega show true nature of the hardware biz

Intel Corp. (Nasdaq: INTC) and Iomega Corp. (NYSE: IOM) have very little in common.

Products, business models, size -- completely different. Even more pronounced is the difference in quality of leadership; Intel has one of the best executive teams in the tech industry, while Iomega's management history is littered with debris from past failures.

But both stocks are taking hits today, and for the same reason: earnings worries. Disk drive maker Iomega today warned of another lousy quarter, while Intel suffered its second blow in as many days when Morgan Stanley Dean Witter analyst Mark Edelstone downgraded the stock to "outperform" from a "strong buy" rating. Intel began falling yesterday after CS First Boston cut earnings estimates.

Hardware stocks: Trouble ahead?

Iomega's second quarter revenue will disappoint partly because the Jaz line of high capacity disk drives isn't as popular as the company hoped (you can thank the rise of recordable CD and DVD players for that). But just as important, part shortages have hurt Iomega's ability to produce enough Zip drives to meet demand; the company also was forced to delay shipping of its Clik PC Card drive.

Intel, one of the best manufacturers in the world, is seeing its own product delays. Analysts say Intel is still eliminating production kinks for Pentium III chips based on the latest miniaturization technology. As a result, the chips will be delayed, and Intel's average selling prices -- which are boosted by new products -- will stay down.

"The company's manufacturing track record suggest we should give management the benefit of the doubt," writes Edelstone, along with analysts John Cross and Louis Gerhardy. "Nevertheless, the sensitive nature of introducing new (chips) during the strong fourth-quarter selling season suggests it is entirely possible that Intel may eventually decide to further delay the introduction. ... Some adverse financial impact should be expected from the initial delay."

As the long-suffering shareholders of Advanced Micro Devices Inc. (NYSE: AMD) can tell you, investing in high-tech hardware truly comes down to manufacturing and production, not the technology itself. Despite the glamour and popularity surrounding stocks such as Intel and Dell -- or even Iomega, which occasionally sees inexplicable spikes in trading volume -- they're not much different than General Motors, Caterpillar, or General Electric.

The argument for technology stocks has always been that their market is growing by leaps and bounds. That's remains the case for one segment, the Internet, but it's not as true as it used to be for hardware makers. The PC industry is still growing steadily, but at this point, much of the increase is powered by the Cheap Box buyers. Who would be crazy enough to pay $3,000 or $4,000 for a computer nowadays? Maybe power users, but that's a small segment and besides, power users truly are crazy.

Although "information appliances" (which will probably be cheap consumer electronics devices anyway) will have their day in the near future, for now, the information technology industry feeds off the PC market. And nowadays, who can tell one PC box from another? There are minor differences in speed and other capabilities, but everything has become standardized for the most part, which is why the main differentiator now is price.

Hardware has gone from being an exotic, cutting edge field to being a commodity industry, a game of I-can-crank-it-out-better-than-you-can. In that sense, Iomega and Intel are similar companies, just with different products. Of course, Intel has been a gem and Iomega a string of letdowns, but either way, how can you get fired up about them? Or about hardware stocks in general?

Other issues:

Quantum Corp.

(Nasdaq: QNTM) Speaking of assembly line industries and price wars, it doesn't get any more commoditized than the storage drive industry nowadays. But Quantum has done well to diversify its product line to include high-capacity tape drives and products for corporate networks; as a result, Prudential Securities analyst Kimberly Alex upgraded the stock to "strong buy" from "hold" and raised her price target to $35 a share from $19.

Corel Corp.

(Nasdaq: COSFF) Software remains a high margin industry, but you'd never know it from Corel's performance in recent years. The company now says it will top analysts' second quarter estimates, but the stock isn't moving much. Investors have been burned too many times to get overly excited about it; instead, they'll wait for details when the formal quarterly report comes out next week.

The overall technology market has been tepid today, as those hardware stocks put a damper on things. With two hours left this week's regular trading, the Nasdaq Composite Index was up 8.43 to 2552.58, the S&P 500 had fallen 0.64 to 1339.26, and the Dow Jones Industrial Average had slid 9.82 to 10831.81. 22GO>