Shares of major personal computer makers tumbled on Wall Street yesterday after a Merrill Lynch & Co. analyst warned that the new prevalance of free and cheap machines could depress prices in the PC business for the foreseeable future.

Shares of Dell Computer Corp. dropped $2, or 4.7 percent, to $40.25. The stock of rival Gateway 2000 Inc. fell 75 cents a share, to $82.50, while Hewlett-Packard Co. plunged $6.31 1/4, to $103.06 1/4.

"The influx of low-cost and super low-cost PCs over the next couple of years could have an overwhelmingly depressive effect on average unit prices," the analyst, Steven Fortuna, wrote in a research report released yesterday.

Fortuna predicted the average unit price of PCs will drop by 11.5 percent in 1999 and 12.1 percent next year. As growth of the number of units shipped slows down as well, he forecast, revenue growth will stagnate: from 7 percent this year to just 1.3 percent in 2002.

The likes of Dell, Gateway and Hewlett-Packard are being challenged by upstarts such as Free-PC Inc., which are offering free systems to people willing to look at on-screen advertisements.

Just as the advent of the Internet this decade created a new generation of computing enthusiasts, so too is the advent of free PCs. It is beginning to open up the PC universe to lower-income users who would rather do without a computer than pay for one.

Today, nearly half of U.S. homes have personal computers, according to recent market research. The number of computers sold grew by 35 percent in June, according to a survey by PC Data, a Reston-based computer research group. The survey only measures sales in retail store--about 60 percent of all home computer sales. The rest are direct, mail-order sales, of which Dell is the market leader, followed by Gateway.

At the same time, Americans who do pay for their computers are in general opting for lower-cost ones. The average cost of an Intel-and-Windows-equipped system is now $890 (not including rebates), down 20 percent from last year, according to PC Data.

Not all analysts share Fortuna's fear of price pressure.

Dell and Gateway have prospered despite pricing pressure for some time now, said Stephen Baker, PC Data's director of hardware analysis.

Baker added that the core market for free PCs is distinct from Dell's and Gateway's. Corporate sales, for instance, which account for significant portions of their revenue, are essentially invulnerable to the free PC phenomenon, Baker said.

"We've seen panic hit this sector before on pricing," said Megan Graham-Hackett, a PC analyst for Standard & Poor's Equity Group in New York. "We've heard that margins are going to hell and that no one would make money."

In fact, she said profit margins have held up well, and there's no reason to believe the recent wave of free PCs will be any different from the groundswell of sub-$1,000 computers that hit the industry last year.

"Yes, it's tough to make money in this business, Graham-Hackett said. "But we've been there before and survived."

Fortuna did not return a telephone call to his Merrill Lynch office yesterday.

UNEASY ABOUT PRICING

A warning about low-cost PCs helped drive down the stock prices of major PC makers yesterday.

Percent change in stock price close, from Wednesday to yesterday

- 5.8% Hewlett-Packard

- 4.7% Dell Computer

- 0.9% Gateway

SOURCE: Bloomberg News