Shares: Chips will fly as PCs power on

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The Independent Online
FROM NOW through the end of the century, there will be a spectacular computer boom. That is the view of Philippe Kahn, chairman of Borland International, the software group, who predicts a quantum leap in the power of personal computers and a tenfold increase in their numbers to 600 million.

Despite the boom, Borland is making losses amid fierce competition in the software market, but other US companies are doing very well, with signs in the closing quarters of 1992 that business was really starting to take off.

For investors who can cope with a roller-coaster ride, here is a way to put some adrenalin in the portfolio.

Top of the list for excitement is Dell Computer, the direct sales business founded by teenager Michael Dell in 1984. The company is heading for worldwide sales in 1993 approaching dollars 3bn, and profits since 1986 have been growing at 100 per cent compound. Shares, floated at an adjusted dollars 5.60 in 1988, are now dollars 46. Latest reported quarterly earnings per share more than doubled to 72 cents, and 1993 earnings are expected to reach dollars 3 - making the prospective p/e around 15, which is moderate by US standards.

Dell's perception is that dealer networks add little in terms of value for customers. It manufactures and sells direct, with a support network that it claims solves 95 per cent of customers' problems over the telephone. Rivals such as Compaq, IBM and Apple are committed to huge dealer networks and cannot undercut them with a Dell-style mail-order operation.

Over a million customers worldwide have bought Dell equipment and 50 per cent of each month's business is said to be repeat orders from this growing customer base.

Another exciting company emerging from the pack is Intel, which makes the processors by which personal computers are typically categorised. When customers talk about a '386' or '486', they are referring to the microprocessor at the heart of the computer. And much of the surge in 1992 was fuelled by people upgrading to the more powerful 486s.

The good news for Intel is that 80 per cent of IBM-compatible personal computers sold are powered by Intel chips. Until recently, this was perceived as a boring commodity market, vulnerable to price wars and margin pressure. But not any more.

Intel has embarked on a brilliant strategy of branding its chips. Computers with Intel chips now must carry a prominent logo, 'Intel Inside', and this is backed up by its advertising.

Intel also uses its financial strength (from annual sales around dollars 4.5bn) for the development of new generations of chips, and this year marks the arrival of the '586' - to be called the Pentium chip.

Like Dell's, Intel's profits have gone into overdrive. The latest quarterly figures showed earnings per share leaping from 90 cents to dollars 1.97 per share with forecasters looking for 1993 earnings to reach dollars 8 against dollars 5 in 1992. The shares have more than doubled to dollars 106 in the last 12 months but still look worth buying on a prospective p/e in the low teens - although investors should never forget that boom and bust is endemic in the computer industry. Intel made a loss in 1986, though it looks a very different and vastly stronger company now.

Last of the 'greats' is one I have written about frequently in the past, Microsoft, which dominates the software market as effectively as Intel dominates the chips. Since Microsoft supplies the operating systems for IBM-compatible PCs and is the leading supplier of applications software for Apple computers, running on Motorola chips, it is rare to find any personal computer without something from Microsoft running on it.

Its 'Windows' packages are selling at the rate of about one million a month, and 'Access,' a new database package launched by the group, had a dramatically successful launch.

At dollars 86.50, Microsoft shares have risen some 40-fold since flotation in 1986, and observers are all looking for the group to put a foot wrong. The prospective p/e is in the high 20s but the group looks so entrenched that well above average growth will probably continue to the end of the century and beyond.

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