Analyst: PC consolidation ahead

Computer makers need to offer servers, a range of PCs, and notebooks to balance out their profit margins, an industry analyst says.

2 min read
SAN FRANCISCO--In order to offset lower margins from falling product prices, such as with sub-$1,000 machines, computer makers need to offer servers, a range of PCs, and notebooks to balance out their profit margins, said Kurt King, a Montgomery Securities analyst, speaking here at the NationsBanc Montgomery Securities investment conference.

Compaq Computer (CPQ), IBM (IBM), Dell Computer (DELL), and Hewlett-Packard (HWP) fit that bill, King said.

Compaq and HP both have 50 percent of revenues coming from other products besides desktop PCs, according to King. That provides a solid foundation for the higher margins that servers produce; it also is good for the business because server sector has maintained a high level of growth. King said the market for servers has grown 35 to 40 percent over the past several years and remains strong.

Improving the product mix will sustain PC makers' gross margin levels despite increasing pressure within the industry to cut pricing, and it will support top-line growth above industry levels by reducing volatility through less exposure to desktop product cycles, added King.

He noted, however, that the growth opportunities will benefit just a handful of players. By the year 2000, the Montgomery analyst predicted that those powerful players will drive consolidation, and in turn, take market share.

The top five players will account for 50 percent of the market share in the year 2000, compared with their 37 percent hold last year.

The marker for sub-$1,000 personal computers is shifting business to the big players from the "other" category, he said.

Shifting the efficiency model will also boost profits for the strongest vendors. Some of the characteristics of the new model will include build-to-order, contract manufacturing, two-to-three week channel inventory, and less than 10 percent price premium over no-name firms. That compares to the traditional model of building-to-forecast, internal manufacturing, 8-to-12 week channel inventory, and a greater than 20 percent premium over no-names.

Compaq's stock closed today at 30-1/8, while Dell closed at 98-5/8. King has a 12-month target of $40 and $120, respectively.