EMachines Shares Keep Plunging on News of Weak Sales
Stock in EMachines Inc. fell 18.6% Tuesday, its second double-digit drop in as many sessions, after a Wall Street analyst downgraded the company’s shares, citing weaker-than-expected sales of personal computers.
Tuesday’s sharp decline follows a 16.5% drop Friday, when executives from the Irvine low-cost computer maker told analysts during a conference call that retail store sales in late April and May fell below expectations, said Richard Gardner, a Salomon Smith Barney analyst who participated in the call.
Gardner said EMachines scheduled the Friday morning conference to discuss the sudden departure of its chief financial officer, Steven Miller, who resigned to join a sports Web site called Swell.com as its chief financial officer.
But the conversation with analysts soon turned to the quarterly progress of the nation’s third-largest vendor of desktop computers, Gardner said.
Executives at EMachines were not available late Tuesday to comment.
Gardner said that, in the conference call, EMachines maintained that the retail PC slowdown was industrywide and did not represent a loss of market share on the company’s part.
Analysts agreed the sector has cooled somewhat. But they also said EMachines has failed to capitalize much from last year’s decisions by Packard Bell NEC Inc. and International Business Machines Corp. to leave the retail market.
“When you have two companies exiting the market, that clearly leaves a vacuum to be filled,” said Charles Smulders, an analyst at the Gartner Group technology consulting firm. “Given that, it’s surprising EMachines isn’t doing better.”
Even before its recent battering, EMachines had a tough time on the public markets.
After pricing at $9 in a March 24 initial public offering, the stock touched $10, but has languished ever since on concerns that the company could not sustain its rapid growth and improve its profit picture. The shares, which had sunk to as low as $4, lost 94 cents Tuesday to close at $4.13 in Nasdaq trading.
EMachines, founded in late 1998, emerged almost overnight as a major PC vendor by selling models for as little as $399. But its profit margins are far lower than competitors’, a worrisome trait to investors increasingly wary of money-losing tech ventures.
Chief Executive Stephen Dukker said the company’s long-term plans hinge on becoming less dependent on computer sales and more on Internet business.
By using technology acquired in its November deal to purchase Free-PC Inc. in Pasadena, EMachines now sells space on its keyboards to sponsors and is attempting to convert Internet users to the single-stroke keys to access a more limited menu of Web sites.
The idea: to get customers where they want without the usual pointing and clicking and to deliver more guaranteed traffic to advertisers.
“Portals make money by introducing ads to customers, but it’s difficult to create loyalty,” Dukker said. “EMachines builds it into the hardware. Customers aren’t using Yahoo today and Excite tomorrow.”
The company’s strategy, however, is still in its infancy--it generated $3.4 million in the year’s first quarter, peanuts compared with the company’s PC sales--and Wall Street may not be willing to wait.
Gardner said he cut his rating from “buy” to “neutral” because he thought the company could miss its financial targets for the second quarter, which ends June 30.
He pointed to the company’s six-week supply of inventory as a sign that, even if sales picked up, EMachines’ results might not.
“For a company like this, with relatively slim gross margins, it doesn’t leave a lot of room for error when you’ve got excess inventory,” Gardner said.
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Times staff writers Marc Ballon and Robin Fields contributed to this report.
