Analysts: It's a banner year for PC sales

All of which points to the best year for the computer-hardware industry since 1996, according to Lehman Brothers analyst Dan Niles. A slowdown in the price-cutting that sent PC prices crashing below $1,000 last year is also helping, he said.

"Semiconductor pricing isn't collapsing anymore, so that's creating a floor under PC prices," said Niles.

Shares of Intel Corp. (intc), Advanced Micro Devices Inc. (amd) and Micron Technology Inc. (mu) jumped Monday on Niles' recommendation that the best way to play the improved sales outlook is to buy shares in the leading makers of PC microprocessors - rather than betting on the individual PC makers.

"With the PC makers, you don't know who's going to execute better, who's going to get the components," he said. "If you're in a war and you supply to all sides, you really don't care who wins."

Niles is not alone. On Friday, Merrill Lynch analyst Steven Fortuna edged his forecast for PC unit growth higher, to 18.5 percent from 17.6 percent, based on a recent survey of PC buyers. In a research note, Fortuna says that for small businesses, PC upgrades are the top spending priority in their information technology budgets. He also cited stronger-than-expected sales in Japan and Asia/Pacific. Demand remains strong across the board for PCs, servers, networking hardware and peripherals, he said.

After a Y2K-related slowdown late last year, some analysts are still cautious about the outlook for 2000. But so far this year, PC makers have been thriving. Earlier this month, Hewlett-Packard Co., Compaq Computer Corp., and Dell Computer Corp. reported better-than-expected earnings. HP said shipments of personal computers rose 60 percent in the first three months of the year. Dell cited strong server sales.

PC sales among corporate buyers are expected to get a boost from the rollout of Microsoft Corp.'s new Windows 2000 operating system, which Niles sees picking up momentum late this year and early next. As part of that upgrade, he expects corporate PC buyers to load up on memory, with the average amount of memory per computer rising to 128 megabytes by the end of the year - up from 90 megabytes on average today and 75 megabytes last year. (Microsoft is a partner in MSNBC.)

PC makers like Dell Computer Corp. (dell), Compaq Computer Corp. (cpq) and Hewlett-Packard Co. (hwp) are also benefiting as the continued growth of the Internet boosts sales of high-end servers, which should also get a lift from Intel's new 64-bit Itanium chip, due out in the third quarter.

Those bigger servers are carrying more high-bandwidth Internet applications like music and video, which is helping to drive consumer demand for more powerful hardware at home. Niles notes that more than 40 percent of all retail PCs sold today include rewritable CD-ROM drives, and many include software used to handle images from digital cameras.

PC makers are also seeing strong laptops sales, as improved processors and longer battery life close the performance gap between desktops and portables. With higher average selling prices, laptops generate higher revenues for PC makers, and prices are holding up well.

"There seems to be a fairly persistent shortage - particularly on the large screen sizes," said J.P. Morgan analyst Dan Kunsler.

The longer-term outlook for PC sales is less certain. Among corporate users, most new personal computers are replacements. And companies are stretching the average lifespan of their PCs from three years to a little over four years, according to S.G. Cowen & Co. analyst Richard Chu.

"That's a sure sign of a maturing market," he said.

Chu says a recent survey of large corporate PC buyers found that they plan to replace just one PC in five this year, compared to about one in four last year.

PC sales will also face growing competition from a new wave of Internet appliances - a wide range of niche devices designed to access the Internet for specific purposes like playing music or checking e-mail. While those devices aren't expected to become a serious threat to PC sales until next year, the days of the all-purpose home computer may be numbered.

"This Christmas could be the last for PC domination," said Merrill Lynch's Fortuna.

Leading PC makers should benefit from continued strong demand. But rising chip prices could make for a closer horse race later this year, as tight supplies increase competition for components among the major hardware makers. Chu says, for example, that Dell's could lose the edge it gets with its build-to-order manufacturing process - which allowed it to better capture the savings of falling chip prices.

"If component prices are going up, then that advantage is diminished or disappears," he said. "In the competitive sweepstakes, the playing field becomes more level."