The Pc Crapshoot

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"If you're a stockholder in the personal computer business, you've probably had your head handed to you by now," says Peter Wright, vice-president of Gartner Group Advisory Inc., a computer-industry research firm in Stamford, Conn.

There are, no doubt, any number of decapitated investors who would agree. If your timing was a little off, for example, you could have bought Apple Computer Inc. stock last year for 63 and watched it plunge to 17 before it registered a modest recovery. Or you could have bought Coleco Industries Inc. for 65, shortly after it announced its Adam home-computer system. At press time, Coleco was trading at around 12 1/4.

Then there is the prospect that things could get worse. When Osborne Computer Corp. filed for protection under Chapter 11, the only investors who lost were venture capitalists and insiders, since the stock hadn't yet gone public. But any number of currently public or soon-to-be public companies could face the same fate. Of the scores of microcomputer makers now doing business, for example, industry analysts expect no more than 10 to capture 90% of the market once the long-expected shakeout begins. "The manufacture of personal-computer hardware reminds me of the early days of the auto industry," observes Michael Jackson, general partner of Hambrecht & Quist Equity Management in San Francisco. "It's an overcrowded market, but not for long."

One way of coping with this mercurial situation, of course, is for investors to get out or stay out of PC stocks altogether. That is a safe strategy, but investors who follow it may miss an opportunity. After their 1983 bath, many personal-computer stocks are undervalued. Then, too, only 32% of the country's businesses now have micros, and the much-sought-after home market is still in its infancy. So demand is likely to stay strong even in the short term. "I think the industry as a whole will double in the next year," asserts Michele Preston, a vice-president of L. F. Rothschild, Unterberg, Towbin, the New York City investment-banking firm. Another strategy is simply to buy IBM Corp. -- which, it is universally accepted, will continue to dominate virtually every aspect of the personal-computer business for the foreseeable future. This, too, is safe, but it's about as exciting as buying life insurance. The attraction of personal computers, after all, is the prospect of an exploding market, the kind that makes billion-dollar companies out of five-year-old start-ups and turns already-big companies into world-class giants. The market won't have that effect on IBM, because it is already so large that PCs account for only 5% of its business.

Then there is the third strategy, which holds the greatest risks but also offers the greatest rewards: Look for companies best situated to take advantage of the growing market, and hang on for the roller-coaster ride. "The key to investing," says Preston drily, "is being highly selective." That means studying a wide range of companies, including software and peripheral-equipment makers, as well as the computer companies themselves. It also means considering both well-established companies and small ones, since it is the industry's growth along with individual entrepreneurial smarts that you are hoping to capitalize on.

And it means learning something about how these companies propose to succeed in a fast-changing marketplace. Regardless of their size, none can do so by staying in one place.

Bill Meserve, for example -- a senior management consultant with Arthur D. Little Inc., the Cambridge, Mass.-baseed consulting firm -- likes smaller makers of hardware or publishers of software that have targeted specific applications or address narrow markets. "The product has to have a focus beyond generic applications and occupy a worthwhile niche," he says. "By worthwhile I don't mean a computer capable of running an earthworm farm. It has to be a solution that has already been accepted, a solution that has made consumers say 'Right on."

One such right-on company, says Meserve, could be Altos Computer Systems (#2 on the 1983 INC. 100 list of the fastest-growing public companies in America), which has developed a computer specifically designed for operation and management of business procedures for small businesses having multiuser applications. Another is Hewlett-Packard Co., whose personal computer is highly compatible with other HP technical products used by engineers for electronic testing and design.

Still another promising niche, which several companies have begun to battle over, is the educational market. Digital Equipment Corp., for example, recently expanded its effort in this department by forming a 14-college consortium that will allow each school to obtain DEC microcomputers at substantial discounts. And Apple Computer announced last January that it has obtained more than $60 million in orders from 24 universities for its Lisa, Macintosh, and other Apple products over the next three years.

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