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November 30, 2000

Gateway Shares Fall on Reduced Forecast for 4th Qtr
By Loren Steffy, Bloomberg

The Bad News Just Gets Worse For Techs: Earnings Warnings Round 2 ... Weiss comments

SAN DIEGO - Gateway Inc. shares fell as much as 39 percent, their biggest one-day drop, after the No. 2 direct-seller of personal computers said fourth-quarter sales and profit will miss forecasts because of weak holiday consumer sales.

The shares fell $10.50 to $19 in midmorning trading after falling as low as $18. They have declined 74 percent this year. The San Diego-based company also cut earnings targets for next year.

Gateway's PC sales last weekend fell 30 percent from a year earlier, Chief Financial Officer John Todd said. Sales usually surge the weekend after Thanksgiving as consumers start holiday shopping. The outlook, which came after warnings and disappointing sales and profit from several other computer makers, renewed concerns about slowing sales industrywide, sending shares reeling.

"This news is going to continue to punish the group," said Tim Ghriskey, a senior portfolio manager for Mellon Bank's Dreyfus Corp., which owns 2.64 million Gateway shares. "It's going to take down Gateway and tech in general."

Sales Outlook

Gateway's fourth-quarter sales will be $2.55 billion, little changed from a year ago and about $500 million less than analysts expected. Profit will be at least 37 cents a share. Analysts had forecast 62 cents, the average in a survey by First Call/Thomson Financial.

The company said it will take a fourth-quarter charge of $200 million, or 39 cents a share, to write off investments in technology-based companies it wouldn't identify. The charge could result in a loss of 2 cents for the quarter. Gateway said earnings per share for 2001 will be $1.89, instead of the $2.28 analysts were predicting.

The announcement stunned investors and analysts because Gateway had been upbeat about its prospects when it released third- quarter earnings in mid-October, J.P. Morgan analyst Daniel Kunstler said.

"How could they, at the end of the third quarter, be so emphatic in their positive guidance for the fourth quarter, and a few weeks later come back and say, 'whoops, wrong answer,' based on the data from a couple of days over Thanksgiving?" said Kunstler, who cut his rating on Gateway to "market perform" from "buy" today. Six other analysts also downgraded the stock.

After its third-quarter earnings report, Gateway told analysts that the consumer PC market looked strong heading into the fourth quarter. Todd dismissed competitors' cautions about slowing sales, declaring in a conference call at the time that "the sky is not falling."

Gateway's reduced forecast follows similar cautions from other PC makers. Dell, Compaq and Hewlett-Packard all have predicted slower sales growth, lower profit or both in recent weeks.

Yesterday, Altera, the world's No. 2 maker of programmable computer chips, said fourth-quarter and 2001 sales will be lower than expected because of weak demand.

"Those aren't the positive catalysts you need to have a rally at the end of the year," said John Spytek, senior technology analyst for Banc One Investment Advisors, which owns about 975,000 Gateway shares.

Ouch! Looks like Gateway shareholders are going to have a grim Christmas indeed. But they won't be alone. Many formerly glittering tech stocks are turning into lumps of coal in investors' stockings.

The Nasdaq has already tumbled over 50% off of its highs for the year. But after the drubbing that the market is taking today, tech investors will look back longingly at even yesterday's low levels.

However, though investors are finally showing signs of capitulation, now is not the time to buy. As we told you before, the Nasdaq still has much further to fall before it reaches a reasonable valuation.

Plus, the bell has just rung on the latest round of company earnings warnings. We all remember how company after company issued earnings warnings last quarter only to come out with actual earnings that were further below their corrected predictions.

Gateway's news today tells us that this quarter will be more of the same. The market will pummel stocks like Gateway when they confess that their business isn't going so well. Then, the market will hammer the stocks again when they confirm it. Don't make the mistake of jumping into the ring just to get hit by the knockout punch.

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