Investors pounded computer stocks yesterday following an announcement Monday by Dell Computer Corp. that rising prices for computer memory chips would cut into profits in the current quarter--and that the company would put fewer memory chips in its computers to cut costs.

Dell shares fell $2.81 1/4 a share, or 6.8 percent, to $38.50; with nearly 81 million shares of the Texas-based computer maker changing hands, it was the day's most actively traded stock.

Prices for computer memory chips have been rising since summer, but jumped some 30 percent last month after an earthquake disrupted manufacturing in Taiwan. Price increases hit Dell especially hard because of its strong focus on keeping inventory to a minimum--a system that keeps warehousing expenses low and allows it to take advantage of dropping prices. But when prices rise, the company has little protection.

Dell is famous for being nimble, "but that ship can't be turned in three weeks," said company spokesman T.R. Reid.

Consumers who want more memory for their computers will have to pay extra for it--a prospect that may chill Dell sales, said analyst Steven M. Fortuna of Merrill Lynch & Co. Fortuna reduced his earnings forecasts for Dell to 18 cents a share for the quarter ending this month, down from 20 cents. The company is still a good long-term investment, he said, but the current crunch makes him rate the stock as "neutral" at the moment.

Other companies, especially Gateway Inc., could share Dell's pain, Fortuna said. Makers of consumer-oriented machines will have a tough time selling in the important Christmas season if prices rise too much, yet buyers won't be happy with companies that cut the number of memory chips in their boxes. "Consumers are not stupid," and know that the amount of memory in a machine profoundly affects its performance, he said. Fortuna said the price increases would ripple through the entire PC market.

Reid said that Dell would not be alone in feeling the sting of rising prices. "We don't claim to have deep insight into other people's business," he said, "but we know enough about the procurement world to know that this is not a Dell issue."

But one industry analyst said that it is a Dell issue; the price squeeze does not presage an industry-wide problem, said Ashok Kumar of U.S. Bancorp Piper Jaffray. Dell left itself little room to maneuver by narrowing its list of chip suppliers from 40 to a dozen over the last two years--and DRAM chips to a single supplier, Kumar said. "The company has reached a level of diminishing returns in its logistics efficiency," he said.

Gateway shares also took a pummeling, dropping $4.62 1/2 to end the day at $46.87 1/2, a slide of nearly 9 percent in the stock's value. Shares of chip manufacturer Intel Corp. fell $4.25, closing at $65.12 1/2--apparently on fears that if PC sales slow, the maker of the industry's dominant microprocessor will be hurt as well.

Another sign of the price squeeze on the industry came as International Business Machines Corp., the company that popularized the PC revolution, announced that it was yanking its computers from stores. To cut costs, IBM said its money-losing PC division will sell desktop machines solely over the Internet. IBM ended the day up slightly, with its stock rising 12 1/2 cents to $107.12 1/2.


The stock prices of Intel, Dell, Gateway and Microsoft declined yesterday amid news of a shortage of memory chips, while IBM was practically unchanged.

Percent change, Oct. 18-19

IBM: 0.1%

Microsoft: -1.8%

Intel: -6.1%

Dell: -6.8%

Gateway: -9.0%

SOURCE: Bloomberg News