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HolidayBuyer's Guide
Tech Industry

Memory costs take toll on stocks

Recent increases in DRAM prices cause investors to shy away from PC vendors.

PC vendors' stocks lately have taking a beating this month, partly due to a massive slide of the entire technology sector but partly because of increasing prices for DRAM components.

The high-tech stock market overall has been in a slump for a month, with nearly every sector taking its lumps. But the recent increase in a basic PC component has made computer vendors' earnings especially vulnerable, a weakness that will probably cause some investors to shy away from PC vendors for at least another couple of months.

Yesterday, the Nasdaq fell by 20.05 points, or 1.58 percent, to close at 1,249.29. The index has lost 10 percent since its high of 1,388 on January 22, fueled by the sell-off of technology stocks.

But share prices of personal computer makers have lost ground over the past month by roughly 10 to 30 percent. Compaq Computer (CPQ), for example, lost 13 percent to close at 72 yesterday.

Gateway 2000 (GATE) took the biggest hit. The company has seen its price plummet almost 30 percent from a month ago. Dell Computer (DELL) saw its shares tumble 19 percent yesterday.

The decline in stock fortunes for these companies involves more than investors' recent aversion to high-tech stocks. Analysts say rising prices of DRAM have put particular pressure on PC vendor stocks.

DRAM is the principal type of memory used in almost all personal computers, and 16-megabit DRAMs currently dominate the sector. Last year, Dell, Gateway, and Compaq enjoyed record lows in DRAM and memory prices.

"They could offer their customers more computer for the money and then pocket a bit themselves, showing a good improvement in profit margin. But DRAM prices are going up, and PC prices won't decline as rapidly," said Gerald Flemming, an analyst with Hancock Institutional Equity Services in San Francisco.

Prices of 16-megabit DRAM chips are on the rise as major Korean memory manufacturers alter their pricing strategies. Contract pricing has risen between 10 and 20 percent over the last month, according to market research firm Dataquest.

An increase in DRAM prices will have a direct impact on computer companies' bottom lines, an impact that worries investors, said Argus Research analyst Wendy Abramowitz. "If we continue to see additional price increases in DRAM, it will continue to affect earnings."

Some of these PC vendors such as Compaq are also getting sideswiped by their connection to the networking companies, which are also being beat up on Wall Street.

"The assumption is that if computer networking is getting hit, then it may be an implication that the PC market may be slowing down," said Abramowitz.

This may be bad news for companies, but some investors looking for a bargain can take advantage of the reduced valuation of these stocks.

"As their stocks have fallen, they have become very undervalued, and those stocks right now are very desirable," said Abramowitz.

Not all her colleagues would agree. "Undervalued? I don't think so. They were pricey to start with and they are still overvalued a little bit, but they are more fairly valued than they were a few months ago," said Hancock's Flemming.

Other analysts say that Wall Street is just not in a mood to invest in high-tech right no. "There is a herd mentality on Wall Street that the bear market has set in," said Smith Barney analyst Megan Robertson. "This is not a huge slowdown, just some dislocations."

She thinks that sales will pick up in the second half of the year and will lead to a gain in the PC makers' stocks.

"Stocks don't go down as fast as these did and then turn around. There are still choppy waters ahead for the next couple of months," said Flemming. Good earnings in the March quarter may put an end to the slump, he said.