University of Michigan
Young covers the PC hardware, PC software and enterprise hardware industries for
technology group. He joined the firm in 1998 from
Prior to that he was an analyst at
Sanford C. Bernstein
Industry Outlook and Style
Long bearish on the PC hardware group, Don Young has recently brightened his outlook. Nevertheless, he believes that these companies must diversify their product lines if they are to excel in the long term. In the near term, he sees recovering PC demand, although he acknowledges that two market research firms,
, are painting a different picture.
Young asserts that "there are growing signs, particularly in the commercial PC environment, of an improvement." He cites as the reasons behind his sunnier near-term view "the combination of putting Y2K behind us, the stimulus from Windows 2000
and the good global economic setting." Furthermore, he sees strong fundamentals for the sector this year, projecting a 17% growth in production of PC units and 20% growth in revenue, a five-year high.
Yet the analyst doesn't altogether dismiss the trend indicated by the IDC and DataQuest statistics -- it's the timing he quibbles with. Over the long term, he does predict a falloff in demand for individual PCs. Declining margins will aggravate the downturn. With these issues in mind, he advises investors to focus on companies that have not only strong hardware sales, but also products and services other than "the box." He observes, "I literally think we're moving from a point where a $1,200 PC generated $350 in hardware margins to a $1,200 PC with slim or no hardware margins but equivalent or even greater profits from beyond the box." These alternative profit streams might include financing or extras such as Internet access, online training, add-ons (peripherals, components, training and services), extended maintenance and onsite service.
Companies he thinks are likely to excel at developing new avenues for revenue include
, in particular, and also
. Since these PC makers sell directly to customers, they have a clear advantage in add-on sales, he notes.
, which he gives an attractive rating short term, raises concerns for Young over the longer term. He praises the company's restructuring changes, but, in his view, Compaq depends too heavily on PC hardware profitability. It needs to move more quickly to develop additional revenue streams, he says.
Although PaineWebber has been upgrading most stocks in the sector, Young is uncomfortable with some of the valuations, citing as examples two of his favorite stocks,
. By contrast, he considers Gateway a great buy regardless of its valuation. (PaineWebber has had an investment banking relationship with Network Appliance.)
On the enterprise side of the hardware sector (an area that includes servers and workstations), Young predicts that low-end servers (those costing less than $50,000) will become the norm. He observes that the emerging computing model for the Internet is based on "server farms," which are huge Internet data centers. Where massive servers once dominated, Young expects companies to shift their computing infrastructure to "racks and stacks" of independent servers powering Internet commerce applications.
Whether the operating system is Linux or NT, Dell will be one of the biggest winners as server farms proliferate, he asserts. And he's betting on Sun as a chief beneficiary of consolidation in the Unix market (though he questions whether Sun can generate growth commensurate with its valuation). Young also says he's bullish on
, predicting that its server business will be a strong growth engine for the company over the next three years.
The server farm computing model will also create opportunities in storage, says Young, particularly network-attached storage. He tags Network Appliance as a particular standout in this space, and he also likes
Favorite stock for next 12 months:
Comment:"No one is doing a better job than they are in developing the beyond-the-box opportunity. Their whole strategy of becoming the consumer's trusted guide to technology is a very valuable franchise to develop and they have it."
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