Can Gateway stay ahead?

Along with Dell Computer, the company is leading the surge in direct-market PC sales, but competitors are not far behind.

2 min read
Gateway 2000 and Dell Computer are leading a surge in direct-market PC sales, and others are not far behind.

Analysts agree that the company's direct-sales strategy has paid off handsomely, helping to pare inventory and prices and ease the pressure on profit margins that falling PC prices has brought. Analysts point out also that the strategy was launched at an opportune time, just as PC buyers are becoming increasingly comfortable with buying PCs on the Net.

Shares of Gateway jumped today, one day after the company posted stronger-than-expected third-quarter earnings. The stock also got a lift today from an upgrade by a Bear Stearns analyst, who raised his rating on the company's outlook to "buy" from "neutral."

"There's no magic here," said ABN AMRO analyst David Wu. "If you go into any of these [brick-and-mortar] computer shops, you wonder why anyone would by from them."

Wu added that retail shops may appeal to first-time buyers, but for a second computer purchase most people "won't go near those places. At this point, they probably know more about the computers than the person trying to sell it to them."

While Gateway, along with Dell are leading the direct-sales charge, competition is ramping up quickly. For starters, Compaq Computer, the world's largest PC maker, is planning to dig deeper into direct sales.

"Compaq has already started their direct-sales model, aimed at consumers in two ways," said Anthony Ianiro, an analyst at Olde Discount. "They are reaching consumers over their Web site, and they will open up kiosks at CompUSA stores.

"It seems that Compaq, as well as other indirect players, is going to have some kind of hybrid sales channels that are both direct and indirect so they can compete in different ways," he added. "The advantage that Dell and Gateway have may erode as Compaq and others get deeper into the direct model."

Piper Jaffray analyst Ashok Kumar cautioned that both Dell and Gateway face other challenges as well. Dell could get slammed by the weakening world economy, he said, while Gateway has been having trouble keeping up with surging demand.

"In the PC industry, the concept of backlog does not exist," Kumar wrote in a research report. "In an industry where the only loyalty is to the lowest price and immediate availability, lost orders are not usually recoverable."

But he remains upbeat. "While we are cautionary short-term, we continue to believe that Dell has the best recipe in the PC segment."