PC demand drives second half

As the stock market continues to slide, rising PC demand is setting the stage for stronger industry performance.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
As the stock market continues to slide, rising PC demand is setting the stage for a stronger-than-expected second half for Intel and other PC-centric companies.

Two analysts, Mark Edelstone of Morgan Stanley Dean Witter Discover and Ashok Kumar of Piper Jaffray raised their earnings estimates on Intel for the third quarter and for the year due to growing PC demand.

Edelstone raised his third-quarter estimates from 73 cents a share to 79 cents a share while Kumar raised his estimate to 80 cents a share. Earnings will surge again in the fourth quarter when more of the higher margin Xeon processors come to market. For the year, Edelstone predicted the company will report $3.15 in earnings per share while Kumar sees a $3.13 total.

"It's just growth in the market," said Edelstone. "The big inventory correction is over." In the end, yearly PC unit growth for 1998 will be in the low to mid-teens.

"We believe Intel and other well-positioned PC-based semiconductor companies are in the process of enjoying a solid increase in demand," he added.

Intel, of course, will not be the only beneficiary of this trend. Rival Advanced Micro Devices will see its market share climb to around 16 to 17 percent, Edelstone added. Gateway, meanwhile, is enjoying unit growth in the forty percent range, according to Ted Waitt, Gateway chairman.

The revised earnings projections are the latest pieces of evidence for a fairly good second half. Memory prices have been stable for five weeks, according to Danny Lam, a principal with Fisher-Holstein, a consulting firm, which indicates that the surplus of memory chips has dried up.

Another bit of evidence: Memory has been going up drastically in New Zealand, he said. New Zealand has no domestic DRAM business and has traditionally been the place where Korean manufacturers have dumped their surpluses. Shortages there, therefore, can be interpreted as a sign of recovery.

If a recovery truly is in swing, Lam predicted tangible financial results of it will roll out over successive quarters. If sales are increasing today, most of the effect will be seen in the December quarter financials. In turn, a pick up in sales would then inspire these companies to purchase semiconductor manufacturing equipment by January. Equipment manufacturers, which have been battered of late, would then show an earnings surprise by the middle of 1999, assuming all goes well.

Hard-drive prices have been stable or have increased, Lam added, while PC monitor prices are expected to begin to rise in October.

Intel's growth in earnings will largely come as a result of volume. Kumar said that Intel will likely ship 23.5 million chips in the third quarter. The company is expected to cut prices on desktop processors in September and October, sources said. No new desktop processors, however, are expected until 1999.

The new Celeron chip will cut into revenue, Kumar added, but the effect of the lower-priced chip line will be offset by increased sales in server processors.

The latest versions of Celeron sell for between $60 to $100 less than Pentium IIs running at the same speed. The Xeon processor for servers, however, sells in the $1,000-plus range. As long as Intel can sell one Xeon for every 30 Celeron chips, the effect of Celeron's lower prices will be neutralized. In the end, Intel's total average selling price will come to $208.

Intel is an investor in CNET: The Computer Network.