Tech Outlook: PC Makers Eye Slow-Moving Corporate Demand

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Nobody said it was going to be easy for the PC makers in 2000.

That was the feeling when the sector rang in the year with shortfalls from Gateway (GTW) and Dell (DELL) and a bevy of Y2K-hangover fears.

Operationally, things have gone more smoothly than many had feared, with corporate sales warming and high-end consumer numbers remaining strong. But that hasn't helped these stocks, which remain mostly right around the levels where they rang in the New Year. So now investors are waiting, once more, for corporate demand to pick up in earnest, to pull these stocks out of the doldrums.

David and Goliath

"I think it's been pretty much as expected," says Gerard Klauer Mattison analyst David Bailey. "The corporate space has been slow to recover after Y2K, perhaps a little slower than expected. But consumer [space] has shown quite strong demand through the first half of the year."

Striking Similarity Up-and-down 2000 for the boxxies

Consumer sales haven't been without their blips. eMachines (EEEE) has seen its stock languish amid a sharp contraction of low-end demand -- shrinkage that showed up in recent figures from International Data and Dataquest showing unit-shipment growth falling considerably from the second quarter from 1999, when sales were pumped up by price wars and a number of free-PC programs. But high-end sales have remained solid, helping Gateway post solid second-quarter growth.

The corporate side of the PC business has been steadily improving. Gateway has been progressively narrowing its losses in commercial PCs, while Compaq (CPQ) has managed to bring its corporate segment back to profitability.

"Most of the vendors have announced that momentum has been building in the corporate space month by month," says Bailey. "And we expect that to continue."

Do Windows?

Corporate demand still has a long way to go, though. And how that story progresses is probably the single biggest item in determining the direction of PC stocks for the rest of the year. Recently surfaced worries about Dell's upcoming quarterly results are inextricably tied up with concerns about the PC maker's broad exposure to the commercial desktop market.

A very big component of commercial PC demand is whether corporations start adopting Windows 2000 at a higher rate. The conventional wisdom is that they will migrate to W2K someday. When they do, they'll need to buy more powerful PCs capable of handling the souped-up operating system. But it's unclear how quickly that process will happen.

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