Will Computer Stocks Stay Fired Up in '95?

Computer stocks soared to dazzling heights in 1994 while the market drifted. Whether they will stay aloft this year depends on several variables, most notably consumer demand.

"The big story is that the personal computer industry, after a very good 1993, raged on in 1994," said Drew D. Peck, a Cowen Co. analyst.

After a 15 percent gain in 1993, the American Stock Exchange's computer technology index gained 22.6 percent last year. That performance really shines when compared with the weak 2.1 percent gain in the Dow Jones industrial average and the 1.5 percent loss for the Standard Poor's 500 index. Most other indexes also turned in declines for the year.

The computer technology index, compiled for options trading, consists of 26 stocks, including well-known names like IBM and Intel, and some lesser-knowns like Computer Sciences. Only five of its stocks, including Unisys and Cray Research, lost ground last year.

Why were computer stocks such winners? One word says it all: consumers. Last year was the first time that the computer industry had depended so much on the consumer for profits. Buying surged at Christmas for CD-ROM software and machines equipped to handle such popular products. By comparison, businesses were tightfisted.

"Without the consumer, the computer business would have been an unmitigated disaster," Peck said. Consumer purchases of computer hardware rose 40 percent last year, compared with a 5 percent increase in business demand, he said. Computer companies can make as much initially from an individual consumer as from a business customer. Both are likely to spend about $2,000 for a computer, Peck said.

Software is another matter. Each new machine bought for a business will lead to $2,000 or more in software purchases in the first year, while consumers on average spend less than $500 for such items as CD-ROM encyclopedias and video games. So demand for software may taper off this year even if consumers continue to buy computers.

"Every analyst is going to watch the March quarter very nervously," Peck said, for any sign of flagging consumer interest.

In the opening days of this year, computer stocks, like the broader market, have inched up. By Friday, the Amex computer index had risen 0.61 percent. But take note, technology stocks tend to rise early in the year on optimistic forecasts, only to slump in the spring and to bottom out in the summer before their cyclical winter rally.

Stephen C. Dube of Wasserstein Perella Securities said he did not expect consumer purchases of computers to fall appreciably this year. Personal computers can be found in fewer than a third of American homes, and are sure to be in the majority within a few years, he reasoned.

Should consumer interest decline, pent-up business demand after a soft year in 1994 could compensate. Foreign sales, especially in an expanding Asia and a recovering Europe, may help, too.

Among the favorite stocks of computer industry analysts are Compaq, Hewlett-Packard and Cisco Systems. And Wall Street sees big things for IBM, with 1995 profits expected to rise almost 40 percent, to $6.07 a share.

Compaq was among the industry's stars last year. After climbing more than 50 percent in 1993, its stock vaulted more than 60 percent in 1994 on an earnings surge tied to consumer sales. More than half of Compaq's revenue in the fourth quarter came from consumer products like the Presario with CD-ROM features, said Dube, who recommends the stock.

Among Compaq's detractors is William J. Milton, a computer analyst at Brown Brothers Harriman Co. Compaq had only "a strong first five months and a so-so seven months," Milton said. The stock has simply returned to its May 1994 price of $40, he added, and can expect to do no better than the overall stock market in 1995.

Shao F. Wang, a computer analyst for Smith Barney, calls Hewlett-Packard a continuing growth story and predicts the stock, now trading at $102, will reach $120 a share within a year. "Hewlett-Packard is hitting on all cylinders," he said.

Roxane Googin, a computer technology analyst for Gruntal Company, expects Cisco Systems to reach $45 a share in the next year, up from $34 now. Cisco, the world's largest supplier of computer networking systems, is "the universal joint of the Tower of Babel," allowing computers from different makers to talk to each other, she said.

But the real emerging areas are digital video and computerized consumer goods, said Peck. LSI Logic will become a major supplier for the next generation of digital video systems, he said. And Microchip Technology makes eight-bit microcontrollers, which are used in in cars, office equipment and washing machines. These microcontrollers could become the paper clip of the Information Age.

Copyright 1995
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