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The Pc Crapshoot


"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.

In the software and peripherals business, many brokers are fondest of the companies that supply IBM. Among the companies they cite are SCI Systems, Intel, and Tandon.

Such investments, however, may not be the sure thing they seero to lie. "Investing in IBM suppliers may look good now, says Meserve, "but it's still a high-risk proposition. IBM has a habit of going outside for much of its procurement [in the early stages of a product's life-cycle.] If demand picks up, the company might press its outside suppliers, or they might just create in-house capacity. If you allow IBM to make the ground rules and then it changes them, will the supplier be able to respond?"

Since most personal-computer software companies are still privately held, it is tempting to try to get in on whatever initial public offerings emerge in the coming months. Lotus Development Corp., the Cambridge, Mass., publisher of the hot-selling business-productivity software package called 1-2-3, went public last October at an offering price of 18. Early this year it was trading for about twice as much. Microsoft Corp., a software company in Bellevue, Wash., produces the version of Basic that is most widely used on PCs, as well as the operating system used by the IBM Personal Computer and most IBM-compatible equipment. And it is widely expected to go public in the next year or two.

Still, the opportunities here may be limited. "I don't anticipate many software companies going public within the next year," says Barbara Isgur, a vice-president of Paine Webber Mitchell Hutchins Inc., in New York City. "Most of them have been able to get the capital they need from other sources."

In general, observes Michael Salter, publisher of Tech Street Journal in Chelmsford, Mass., a monthly that tracks the financial performance of high-technology companies, even investors who don't own IBM stock have to watch what the company does. Big Blue, he predicts, will ease the personal-computer industry's tendency toward aggressive -- some say suicidal -- pricing, and will thereby help raise margins. But he maintains that the reality of IBM's market domination will dampen the reception accorded to other companies' new products. He predicted, for example, that Apple Computer's stock would rise following the introduction of the Macintosh. (And, in fact, it went from around 20 last December to 24 1/2 in early February.) But Salter thinks that the company will eventually lose market share to its bigger competitor -- which, he points out, "has the ability to maketh and taketh markets."

Gartner Group's Wright, despite his sanguineous view of the market as a whole, likes long-time standouts like Hewlett-Packard and Wang Laboratories Inc. He also likes some newer companies that have indicated potential staying power by positioning themselves in the IBM market, including Compaq Computer Corp. and Eagle Computer Inc. "Look for companies with momentum," he advises, "and those that have lived through the cycle."

And then, he might have added, hang on. Even if your portfolio's long-term trajectory is up, there are sure to be a few dips and dives along the way.

John F. Persing


52-week 52-week 2/3/84

Company high low price

Altos Computer Systems 27 3/4 7 1/4 10 3/4

Apple Computer 63 1/4 17 1/4 24 1/2

Coleco Industries 65 12 7/8 13 1/4

Commodore 60 5/8 28 28 1/2

Compaq Computer 14 7/8 9 5/8 9 3/4 bid

Corvus Systems 22 1/2 7 1/8 7 1/2

Digital Equipment 132 1/8 64 85 1/2

Dysan 33 1/2 15 3/4 17 1/2

Eagle Computer 24 3/4 6 3/4 7

Fortune Systems 22 1/2 5 1/4 5 3/4

Hewlett-Packard 48 1/4 34 1/4 38 3/4

IBM 134 1/4 93 7/8 110 3/4

Intel 46 1/4 20 5/8 34 1/2

Kaypro 10 5/8 4 3/4 6 3/8 bid

Key Tronic 26 1/2 16 1/2 20 3/4 bid

Lotus Development 40 22 34 3/4 bid

Miniscribe 14 4 7/8 5 5/8 bid

SCI Systems 30 1/2 14 5/8 18 3/4

Seagate Technology 2 1/8 10 5/8 11 7/8

Tandon 35 1/4 14 1/2 15 1/4

Tandy 64 1/2 33 1/4 33 7/8

TeleVideo Systems 40 1/2 12 5/8 13

Vector Graphic 12 7/8 1 7/8 2 1/4

Victor Technologies 22 1/8 1 7/8 2 1/2

Wang Laboratories 42 1/2 28 28

Last updated: Apr 1, 1984

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