Late on Friday, the PC analysts were fuming. At the end of a quiet week,



shocking earnings preannouncement caught most analysts wrong-footed, and forced them to rearrange their earnings models for the whole PC and hardware sector.

There was a time when Compaq was a Wall Street darling. Oh, how time has changed. Compaq now says that it would report earnings of 15 cents a share, less than half of the 31 cents a share that analysts expected. Revenues will be around $9.4 billion. Compaq blamed weak demand and tough competitive pricing pressure for the fall in profits.

One analyst, however, was gloating. "Did I tell you, or did I tell you?"

Piper Jaffray

analyst Ashok Kumar gleefully said shortly before he went on


Friday evening to crow about his prescient Compaq earnings prediction.

Just last month, Kumar said the Houston, Texas-based PC maker would earn 20 cents a share in its March quarter. Kumar, who maintains a buy rating on Compaq, had previously said Compaq would earn 35 cents a share, in line with consensus estimates at the time.

Most PC analysts seemingly misjudged the buying patterns of corporations this year. In January, the consensus was that companies would keep buying PCs and computer supplies during the first half of 1999, and then orders would tail off as Y2K approached. But it seems as if corporations made their big PC orders in the second half of 1998. PC demand is down sharply this quarter, and some 20% below December 1998 quarter levels, according to recent projections from

Credit Suisse First Boston


In terms of the PC industry, the news just isn't good -- no matter how you look at it, says Don Young, an analyst at

Paine Webber

. "I hate to see the industry I cover get trashed," he says. "But investor's attitudes had been that it's bad, but it's going to get better, and that's a Pollyannish view in my opinion."

In February,


(DELL) - Get Report

disappointed the market with its weaker-than-expected revenue growth. Now comes Compaq, the leading PC seller in the US, complaining of pricing pressures.

"It's the profit margins that were hit hard," says Walter Winnitzki, an analyst at

Hambrecht & Quist

who had a buy rating on the stock. Winnitzki says that pricing pressures combined with lower-than-expected PC demand are hurting Compaq -- which sell more PCs than anyone -- extremely hard. Hambrecht & Quist and Piper Jaffray have done no Compaq underwriting.

The rest of the industry will also be hit hard because this quarter in particular is so back-loaded, says Jeff Matthews, money manager at

Ram Partners

, who is bearish on the industry.

"This has implications for





(IBM) - Get Report

as well -- this isn't just an isolated problem because all these companies do not have a lot of visibility this quarter," he says. IBM and H-P are the third and fourth-largest sellers of PCs worldwide. Matthews has no position in PC stocks.

Compaq's dire warnings will be a shock to the rest of the tech sector Monday morning, especially PC-centric semiconductor stocks such as


(AMD) - Get Report



(INTC) - Get Report

, which will announce first-quarter earnings late Tuesday.

As for the chip stocks, the relatively short bull run in the sector may be over. The dour Compaq news will certainly push lower the

Philadelphia Semiconductor Index

, which was ever so close to an all time high, said

CIBC Oppenheimer

chip analyst Ken Pearlman. "It can't be positive," he said.

Pearlman said he's been concerned that companies are putting on hold the buying of new hardware or enterprise software while they conduct tests for Y2K bugs. "We are doing that here at CIBC, we'll have a lock down period and a lot of companies are doing it," he said.

Pearlman believes Intel's outlook will not be good, given that Compaq has warned about decreased market demand. He expects Intel to report a soft mix of products sold and decreasing average sales prices.

The recent bullishness in computer hardware and chip stocks comes despite rumors mid-March that Intel would preannounce (it did not) and two preannouncements by the


chip maker AMD.

"The market just doesn't seem to respond to anything anymore," he said. "At best we will have a lot of volatility until the stocks can absorb some of the price gains."

In the meantime, Intel's earnings Tuesday suddenly have become the key numbers for the whole health of the industry.