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Gateway shares take a tumble

The PC maker's stock plunges 25 percent as the company struggles to recover market share in an ever-tightening consumer market.

PC maker Gateway's stock plunged 25 percent Tuesday, a day after the company announced that revenue will be lower than expected for the fourth quarter.

Gateway's stock dropped $2.56 to close at $7.69.

On Monday, Gateway said it sees a 15 percent decline in unit sales from the third quarter to the fourth quarter, which is typically the strongest quarter of the year. The company also said that revenue for the fourth quarter will come in around $1.16 billion. Analysts were expecting Gateway to post revenue of $1.39 billion for the quarter.

Meanwhile, Moody's Investors Service downgraded Gateway's credit rating to junk status in reaction to the company's announcement and will keep Gateway under review.

"The action reflects growing concerns regarding the company's ability to maintain or grow revenues and market share in the intensely competitive U.S. personal computer market, and therefore to achieve its goals of returning to stronger levels of profitability," Moody's said in a statement. "Moody's views declining unit sales as negative for the franchise longer term."

Although it appears that Gateway managed to cut costs during the fourth quarter and even boosted the average selling price of its PCs, the company is seemingly fighting an uphill battle in an ever-tightening PC market.

Other major PC manufacturers saw a rebound in sales from the third quarter to the fourth quarter. Compaq Computer, for instance, said it will post a profit for the fourth quarter. Unlike Compaq, Gateway primarily sells its products in the U.S. consumer market, where purchases have slowed considerably.

"Struggling with an unsustainable business model, Gateway announced a significant revenue miss for the December quarter," U.S. Bancorp Piper Jaffray analyst Ashok Kumar wrote in a research note Tuesday. "Gateway U.S. unit sales are expected to be down...a whopping 35 percent year-to-year. This is in sharp negative contrast to the domestic retail industry, which is expected to...remain flat year-to-year."

Kumar added that the "inherent fixed costs of the Country stores and the management's inability to leverage the store assets to sell value-add IT services lends to an unsustainable business model."

The Poway, Calif.-based PC maker has been fighting to stabilize itself since August 2000, when computer buying around the world began to stall. Gateway has switched CEOs, revamped its management team, pulled out of international markets, and laid people off in cost-cutting measures. Nonetheless, the company has continued to lose market share.

In the third quarter, for instance, Gateway's market share in the United States declined from 9 percent to 7.4 percent, according to market researcher Gartner. Overall, the company's PC shipments for the period declined 33.5 percent year over year in the United States, while the industry on average saw an 18.7 percent decline.