The battle over the future continues. Volatile in even the best of times, the computer industry has never provoked more argument among experts or within companies themselves than it has in a very difficult 1991.
Consider Compaq Computer, once the fastest-growing company in the United States. Its board recently fired Rod Canion, co-founder and president, following a 14-hour board meeting. This occurred two days after the company announced 1,440 layoffs and a $70 million quarterly loss, its first red ink ever.
The personal computer business, celebrating its 10th anniversary, grew at a 15 percent to 20 percent annual clip until this year. Then it hit the wall. Worldwide recession contributed, but an underlying problem is that the PC became a commodity. Customers are willing to buy equipment that doesn't have a brand name, leaving this low-end ($1,000 to $4,000) business in deep trouble.
The second portion of the computer industry, the work-station group, is prospering because more companies and individuals want equipment that does more than a PC but doesn't require the financial outlay of a mainframe. This equipment is in the $5,000 to $20,000 range.
The third portion of the industry, mainframe computers, was flat in sales for two years and plummeted this year. It's easy to postpone a corporate purchase that could cost up to $25,000, and many analysts believe mainframes may have negative growth for five years.
"Computers have become a classic cyclical industry now that PC growth has slowed, and greater competition has meant lower profit margins," observed Philip Rueppel, analyst with Sanford Bernstein & Co. "Fundamentals aren't good, but the rate of technological change remains as strong as ever, and somewhere out there is a product that will become the next PC."
The trick is to find a company with potential whose stock has been beaten down.
"Watch how a company is positioned, and realize that if it's in the low end of the business, it will be difficult to make money," said Robert Chow, portfolio manager for the $19.4 million-asset Fidelity Select Computers Portfolio, up 26 percent this year. "Now through December is the time to be buying computer stocks, since their prices are reasonable and the group's tendency over the years has been to go up in January and the first portion of the year."
There are two investment approaches, according to Bruce Lupatkin, software industry analyst with Hambrecht & Quist. "You can identify companies that are industry leaders and stick with them through thick and thin," he said. "Or pay attention to the markets, buy stocks a quarter or two before new products are to come out, watch prices go up and then sell."
International Business Machines is recommended by Rueppel because its mainframe product cycle is just beginning.
Not everyone agrees. "The shipment of IBM's first new mainframe in six years will be positive over the next six months due to the backlog of orders," said Chow. "But once that period is over, I think it will revert to a no-growth situation."
Microsoft Corp. is recommended by Rueppel and Lupatkin as a well-run company with personal computer software products in all the right areas.