The Chips Are Down
Investors sour on tech titans like Dell, Intel, and Microsoft as they lose their growth-stock allure
Bad news has pounded steadily on the giants of personal computing as Dell, Intel, and Microsoft reported disappointing results in recent weeks. Each has made unique strategic and tactical errors and is scrambling to correct them. But their troubles point to a broader slowdown in PC sales, which enjoyed a three-year spurt but now appear to be decelerating again, perhaps to finally settle in as a mature market with growth rates more like those of the nation's overall economy. That the PC business is gradually slowing is not news. "But it's maturing a lot faster than many people were expecting," says Roger Kay, a market analyst at Endpoint Technologies.
That means an end to double-digit expansion, unless the companies can shift to new products or to new parts of the world. Neither is happening fast enough for Wall Street, where traders have sent stocks of the three titans of tech tumbling 15 to 25 percent over the past six months while the overall market has steadily risen.
Red ink isn't the problem. Dell reported last week that it had shoveled in $762 million in profits last quarter. Intel earlier notched a gain of $1.3 billion, and Microsoft beat them all by continuing to net an average of $1 billion a month. But that wasn't enough for investors, who keyed on signs of slowing growth at each company--in good part because of sluggishness in the corporate markets that remain the PC industry's bedrock. And there is no "killer app" on the horizon to rejuvenate corporate spending, says Scott Kessler, a technology analyst at Standard & Poor's.
Bold or old? Microsoft perhaps has suffered the longest, with a stock price that has been stagnant for five years and an identity problem. Investors confuse it as either a growth play, with the promise of a rising stock value, or a value investment that throws off steady cash. The latter grew more likely as Microsoft started paying a dividend three years ago. Then came an apparent shift with its earnings report in late April. Besides falling short in expected profits, Microsoft surprised investors with plans to plow an extra $2 billion next year into new products--sounding again like a growth company. "Throughout our history, Microsoft has won by making big, bold bets," CEO Steve Ballmer wrote to employees.
Many analysts question the risk. "We are shaking our heads," wrote Mary Meeker, a Morgan Stanley analyst, as she downgraded Microsoft from "overweight" to "equal weight." Its stock went on a one-day, 11 percent tumble from which it hasn't recovered.
Other analysts say Microsoft needs to invest to embrace technology's move to the Web, as well as the rise of consumers as the industry's growth segment. "The consumer has driven a lot of the fundamental growth in [tech] stock appreciation," says Kessler. The companies that have enjoyed rapid growth cater to consumers: Apple captured early buyers for downloading music while selling them iPods to play it on; Google improved online search and succeeded by winning consumer converts one at a time by word of mouth. Microsoft has numerous ventures aimed at households, including its Xbox gaming system and Windows-based consumer electronics, but it hasn't yet made money at any.
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