Why Wall Street got fidgety on Digital
Financial analyst John McManus of the Bear, Stearns & Co. brokerage firm pulled a thick sheaf of paper from his briefcase. ''This one's for the garbage shredder,'' he grumbled.
It was an analysis of the stock price and earnings prospects of Digital Equipment Company of Maynard, Mass. The conclusion, arrived at several weeks ago: Buy Digital.
But Digital, one of the pioneers of the minicomputer market, shocked investors this week with an exceedingly poor quarterly profit projection. The stock price plummeted.
In the latest evidence of intense competition among the 150-plus computer companies in the United States, Digital estimated its third-quarter profit had fallen 65 to 75 percent. That news sent Digital, computer issues in general, and the Dow Jones industrial average sliding downward early in the week. Within two trading sessions, however, many of these stocks began to recover, although Digital was still down 273/4 points.
''This really shocked everyone,'' Mr. McManus said of the Digital profit estimate. Bear, Stearns, one of several companies that had thought Digital was going to show healthier profits, quickly removed it from its recommended-stock list.
In some ways the Digital/Bear, Stearns story typifies the changes coming over the computer industry today. Last year computer companies in the eyes of investors could do no wrong. Not so now.
Although the demand for computer equipment is doubling annually, the market has become extremely crowded. Competition involves aggressive advertising, severe cost cutting, battles for shelf space and name recognition - and leapfrogging technological developments that can confuse customers and make new products obsolete within months.
This struggle is primarily being waged for the shrinking share of market that the juggernaut of IBM's personal computer has not yet swallowed up.
Last month Osborne Computers was a casualty of the competition. Earlier, Texas Instruments was hard hit. High-tech stocks, with the exception of IBM and a few other industry leaders, have been severely shaken since midsummer. Venture capital for new computer companies - which last year were going public in record numbers - has been drying up the past six months.