Abstract: We recently updated our annual survey of U.S. households to evaluate the changes in PC ownership, usage and purchase intent. Several key issues emerged from the survey. First. PC ownership continues to be closely tied to house- hold income, with the penetration rate in the high-income households at 63% vs. 35% overall. Second, the majority of PC purchases in 1996 were made by households that already owned a PC. Nearly 64% of PC purchases were for replacements and/or additional units. Third, households from all income groups expect to spend significantly less on PCs purchased in 1997 than PC purchasers spent in 1996, about 20% less overall. Based on our analysis of the survey, results, for 1997 we are forecasting 4% unit growth (13.5 million units) in consumer demand and a decline of 10–15% in average PC selling price. Underlying the unit forecast is a shift back towards first-time buyers, as we expect unit sales to this group to grow 25% versus 1996. Because households with income over $50,000 are already highly penetrated, we expect the overwhelming majority of first-time buyers to be from households with income below 550,000. A decline in the average selling price of PCs appears inevitable as manufacturers shift their mix to reach this target. We believe the increasing prevalence of the 51,000 PC as well price declines of high-end boxes will inevitably result in lower average selling prices. Given that the trends for U.S. consumers are being echoed in non-U.S. markets and some business areas, suppliers to the PC industry face a challenging environment. The current estimates of DRAM pricing and miners- processor revenue growth imply that the average semiconductor content per PC will increase by $40 in 1997 and $40 in 1998. To accommodate a projected increase in semiconductor prices, there should be either an increase iii the PC ASP or decline in the value of disk drives, monitors or other peripheral products. With our research indicating that the average PC price is unlikely to increase, suppliers to the PC market will begin to feel some incremental pressure on revenue growth. We are below consensus on Advanced Micro Devices' 1998 EPS. Our Intel 1998 EPS estimates may be at risk, unless the company can successfully accelerate the high-end PC growth within tile corporate and international markets. Likewise, Micron earnings estimates incorporate a relatively benign environment, with stable prices through the end of the year. We rate all three stocks market-perform. The lower PC prices will have an indirect adverse impact on margins of the PC vendors. In particular, a decline in prices will force an even faster rate of consolidation in the industry, which will in turn create margin pressure. Among the PC vendors, we rate Compaq outperform, as near-term momentum and server sales are strong. Given the prospects of a relatively unattractive PC retailing environment in 1997, we continue to rate Best Buy, Tandy, CompUSA and OfficeMax market-perform. We like the longer-term outlook for Circuit City as regional consumer electronics retailers exit time segment, and the stock is rated outperform. We have been enthusiastic about the prospects of the combined Staples/Office Depot, but may need to revise this omen' in light of the FTC's second vote to block the merger. [ABSTRACT FROM AUTHOR]
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