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ANALYST WATCH: Earnings, outlook mixed for leading techs

In the wake of another batch of key earnings reports, analysts gave the likes of Gateway, AOL and Amazon.com mixed reviews.

Gateway Inc. (NYSE: GTW) beat the Street in its second quarter, raking in $89 million, or 56 cents a share, on sales of $1.9 billion.

First Call consensus pegged the PC maker for a profit of 55 cents a share in the quarter.

The $1.9 billion in sales represents an 18 percent jump versus the year-ago quarter when it made $60.7 million, or 38 cents a share, on sales of $1.6 billion.

In the quarter, Gateway shipped more than 1 million units, a 36 percent increase from the year-ago quarter.

"Going forward, while we still expect hardware sales to contribute the majority share of revenues, non-system sales will be the primary driver of earnings," Kumar said. "While the ISP revenue stream represents about 10 percent of the non-PC revenue per customer, it carries over 50 percent in margins."

The irony with Gateway is that although 16 of the 22 analysts following the stock rate it either a "buy" or "strong buy," there's one analyst recommending customers sell the stock even though it's shown solid sales and earnings growth this year.

And another analyst, who didn't want to be identified, said the possibility of it buying EarthLink Network Inc. (Nasdaq: ELNK) makes no sense.

"If Gateway were to do that, it would be disastrous," the analyst said. "I'm hoping that these rumors are just that. That would lead (Gateway) down a path it's clearly not ready for."

However, the rest of the Gateway crew jumped on the bandwagon.

ABN AMRO upgraded the stock from "hold" to "outperform" and set a 12-month price target of $84 a share. Donaldson, Lufkin & Jenrette raised it from "market perform" to "buy" and ING Barings boosted it from a "hold" to "strong buy."

Keep in mind, consumers want free boxes these days. How Gateway deals with declining average selling prices and the packaging of PCs and Internet access will determine its success on Wall Street.

"The PC industry is fairly price inelastic," Kumar said. "What that translates to is that all low priced vendors are supplying the industry demand curve, and not creating incremental demand. Gateway needs to be cognizant of the pressure from down under."

A tale of two Net stocks

Both America Online Inc. (NYSE: AOL) and Amazon.com Inc. (Nasdaq: AMZN) reported earnings this week and analysts are decidedly more infatuated with AOL at this juncture.

After posting a profit of $156 million, or 13 cents a share, on sales of $1.4 billion this quarter, analysts reiterated their "buy" recommendations on the stock and raised its price target.

First Call consensus expected the world's leading online service provider to make 11 cents a share in the quarter.

James Preissler, an analyst at PaineWebber, said the stock could be worth as much as $224 a share. He raised its fiscal 2000 sales estimate from $6.17 billion to $6.37 billion and expects earnings per share to be around 59 cents.

Merrill Lynch's Henry Blodget also reiterated a "buy" on the stock and bumped its fiscal 2000 sales forecast from $6.2 billion to $6.5 billion. He expects AOL to return a profit of 60 cents a share in fiscal 2000.

"We believe AOL has become a communications hub that will prove more critical in the emerging world of multiple devices connecting us through the Web," Blodget said in a research report. "Over the next few months, we expect investors to wake up to the power of AOL's position. As such, we believe now is the time to grow more aggressive again on accumulating the stock."

Amazon.com wasn't as fortunate.

It did meet analysts' estimates in its second quarter, but the slowing sales growth and lack of visibility left some analysts unfulfilled.

It lost $82.8 million, or 51 cents a share, on sales of $314.4 million. That sales figure was only a 7 percent improvement compared to the first quarter.

It also announced a 2-for-1 stock split, so it might see a nice short-term jump.

"We expect some investors may be growing impatient with the company's policy of minimal disclosure," said Lauren Cooks Levitan, an analyst at BancBoston Robertson Stephens. "While we do anticipate extended volatility and pressure on the stock as we await more evidence in terms of revenue growth and eventually margin improvements, we expect Amazon to win a disproportionate share of consumer and investor enthusiasm during the upcoming holiday season."

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