First Intel, now Apple 8212; Has PC growth hit a wall?

On Thursday, Apple issued a sweeping warning, saying business had slowed on all fronts. The warning followed one by Intel, which makes the computer chips used by most of Apple8217;s rivals. Intel warned a week ago that it was seeing slack European sales.

US stocks fell on Friday after investors were driven from equities by Apple Computer Inc8217;s earnings warning, the latest ingredient in September8217;s recipe for a bear market. The Nasdaq composite index fell 105.67 points, or 2.80 per cent, to 3,672.65, according to the latest figures. The Nasdaq got hammered by losses in computer makers, semiconductors and other computer-related stocks.

More bad news has come from printer maker Lexmark, with trouble in Europe and its consumer businesses, and SCI Systems, one of the world8217;s leading contract manufacturers, which warned of weak PC and consumer electronics businesses.

On Friday, Bear Stearns top technology analyst, Andy Neff, departed from his normally upbeat stance and cut his rating on all the sector8217;s top names: not just Apple, but Compaq, Hewlett-Packard, Gateway and Dell. quot;We want to wait for the evidence pointing to stronger demand trends and/or compelling valuations in order to revisit our rating,quot; Neff advised clients in a research note. Morgan Stanley8217;s PC analyst raised similar concerns about the macro-economic environment8217;s threat to PC demand.

Investors fear new signs of PC weakness:

Computer stocks took it on the chin on Friday after Apple8217;swarning that sales of educational and consumer products had hit a wall, leading its results for the September quarter, normally Apple8217;s strongest, to fall far short of investor expectations.

Apple stock lost more than 52 per cent of its value to trade at 25.75, as nearly 10 billion in shareholder value vanished, leaving the company with a market capitalisation of about 9 billion. More than 100 millions shares traded hands.

Caught in Apple8217;s wake was Gateway, another PC maker whose business heavily depends on consumer demand. Its shares tumbled 16 per cent to 46.75. The drop came amid reports that Apple was looking to open several Apple-branded stores, seeking to steal a page from Gateway8217;s successful retail strategy.

Intel lost 2-7/8, or 6.5 per cent, to 41.56. Dell lost 2.625 to trade at 30.81, down nearly 8 per cent, a new year low. Microsoft touched year-lows before inching up to trade at 60.25, down 1.06. All trade on Nasdaq.

Compaq lost 3.09 to 27.58. Micron, the leading US maker of computer memory chips, lost 9.4 per cent to trade at 46, down 4.75, as PC industry woes made the chances of any rebound in world memory product prices less likely. Both trade on the New York Stock Exchange.

Still, many Wall Street analysts were quick to jump to the defence of PC makers such as Compaq, Gateway and Hewlett-Packard, saying the latest troubles were Apple-specific and not industrywide. Market researcher International Data Corp forecasts that overall PC shipments will grow about 17 per cent this year, bolstered by 19 per cent growth in the fourth quarter, when traditional holiday-season buying and expected increases in demand for Microsoft-based business PCs should lift sales.

Investors losing patience: Several PC makers recently reaffirmed that their outlooks for the current quarter remain intact. But investors are impatient and many trimmed their holdings in PC-related stocks as the quarter drew to a close and ahead of next months8217; earnings reports.

A Gateway spokeswoman declined to comment Friday on financial results for its third quarter ending this week, saying the company has been in a quot;quiet periodquot; since September 15. On September 22, Gateway said it was comfortable it could meet Wall Street8217;s consensus earnings estimate as of September 15.

Investors remain in suspense about the last two weeks of the quarter, typically the strongest part of the quarter for back-to-school and government fiscal year-end sales in the United States.

Compaq Chairman Michael Capell as declined to comment on third-quarter results in an interview with Reuters late on Thursday. Round Rock, Texas-based Dell holds a bi-annual analyst briefing late next week, which could provide indications on how it is faring in its quarter ending in late October.

Hewlett8217;s Chairman Carly Fiorina said Wednesday her company8217;s quarter remained quot;on track.quot; A spokeswoman did not immediately return calls seeking further comment. Some analysts argued that Apple is a market unto itself.

quot;Apple8217;s Miss Really points to one of two things,quot; said PaineWebber analyst Don Young. quot;One, Apple8217;s comeback is over. Or, two, there was a worldwide softening in consumer PC demand in September for all PC vendors,quot; he said.

quot;We are casting our vote that this problem is unique to Apple,quot; he said.

The big problem is that data remains sketchy about PC sales for the month of September, Young said, although he noted that Gateway has reported continued success in its retail store outlets based on recent sales data.

Salomon Smith Barney analyst Richard Gardner said that potential explanations for Apple8217;s worldwide sales slowdown could include a fall in US and European consumer spending accelerated by higher oil prices and interest rates, issues likely to drag down rival PC makers as well. He also suggested that aggressive pricing by Apple8217;s competitors had undermined demand for its new high-priced products, which have met with rave reviews, but lower than expected sales.