Wall Street Ties Its Fortunes to Microsoft's Windows

Analysts See Boon For Dozens of Firms In High-Tech Area

By Molly Baker, Staff Reporter. With Larry Bauman.
The Wall Street Journal

June 19, 1995

Microsoft's Windows 95 may create a tidal wave in the technology and financial markets, but investors looking to profit by it should search among the ripples.

Certainly no one should underestimate the significance of the new operating system, scheduled to be shipped on Aug. 24, less than 10 weeks from now.

"This is a broad infrastructure change that will have ramifications not seen before," proclaims Chris Galvin, a software analyst with Hambrecht & Quist. "This is not your normal upgrade cycle; it is a very significant event."

Obviously, Microsoft has the most to gain or lose from Windows 95 and its price already reflects that. But changes the system will bring -- providing, of course, that it is successful -- will be a boon to dozens of other companies.

Consider, for instance, that the new operating system probably will make obsolete many of the personal computers sold in the past decade. The sheer number of people who will be seeking to replace or upgrade their existing PCs suggests that computer retailers like CompUSA will be mobbed.

"With its ease of use, [Windows 95] will also draw new users to computers for the first time. It's likely to be one incredible Christmas season," says Shelton Swei, a technology analyst and portfolio manager at Fred Alger Management.

"Because CompUSA is more on the consumer side, they will benefit from the consumers' quick adoption rate," says Mr. Swei. "They'll get traffic from people in the stores getting the upgrade and those people just might pick up a game or two at the same time."

Wholesale distributors such as Tech Data and Merisel can also expect burgeoning orders for both hardware and software. They are two of the largest middlemen that put computer equipment and supplies from the major manufacturers on the shelves of retailers.

Along with Windows 95, consumers will also be snapping up new utilities programs, such as virus protection and hard-drive backup tools, as the old set won't work with Windows 95. Many money managers are betting on Symantec, which controls about 75% of the utilities market.

"Our logic with Symantec is real simple. Once [Windows 95] gets released, the utilities upgrades will be pervasive, just like when Windows 3.0 was introduced," says Edward Antoian, a portfolio manager with Philadelphia-based Delaware Management.

Then there are the memory makers. Windows 95 will gobble up memory, requiring at least eight megabytes of random-access memory, or RAM, to run its various tools. Most consumers have been buying computers with just four megabytes of RAM and will be turning to the memory providers for upgrades.

"I think eight megabytes of RAM will be underpowered, and most are going to be looking for 16 megabytes," predicts Charles F. Boucher, a semiconductor analyst with Hambrecht & Quist.

Although the big RAM makers such as Micron and Texas Instruments are the obvious names, smaller companies could profit from the memory demand.

"When it comes to Windows 95, anyone selling anything remotely related to memory will benefit -- because you'll need it," comments Lise Buyer, an analyst with T. Rowe Price's Science and Technology Fund.

Integrated Silicon Solutions, which makes the higher performance SRAM memory circuits, is already producing at capacity and orders are expected to increase. The Sunnyvale, Calif., company's shares, which rose 1/4 to 51 Friday on the Nasdaq Stock Market, have soared from an initial offering price of 13 in February.

Another 1995 IPO that might ride Windows 95 to bigger gains is Oak Technology, a maker of semiconductors and software specifically for multimedia applications. Multimedia is supposed to be one of Windows 95's especially strong suits. Oak's stock has been rising in tandem with consumer demand for CD-ROM-equipped computers. Shares have more than doubled since Oak's first-quarter IPO at 14 a share to Friday's close of 34 1/4, up 3 1/4.

Once armed with the latest turbocharged computers and the new operating system, consumers will turn to software developers to write more advanced multimedia titles to take advantage of that power. To hear and see all of the bells and whistles of the new programs, computer makers and consumers will be loading their PCs with all kinds of graphic accelerator chips and boards.

A number of smaller companies specialize in the graphic chips market, and their stocks have been soaring this year. S3 has more than doubled this year, closing Friday at 34 5/8, down 1. Trident Microsystems has gained 64% this year to close at $19.25 a share on Friday, up 1/2, while Chips & Technologies, which focuses on the portable PC market, has gained 55% since January to end last week at $11.125, up 1.

S3 got an added boost last week when Compaq Computer said it would use an S3-produced multimedia chip package in one of its PC lines. Following the announcement, S3 said it was comfortable with analysts' sales estimates for the year of $300 million, compared with $140 million in 1994.

The second quarter played host to two hot IPOs of companies which make boards combining the various graphics and multimedia chips. Diamond MultimediaSystems and Number Nine Visual Technology should both get a boost from consumers who want to upgrade their capabilities without buying a new computer.

In addition to selling the boards, Number Nine also makes its own high-end 128-bit graphics card -- enabling computing to run at near Mach speeds compared with the current 16-bit standard and Windows 95's breakthrough 32-bit capabilities.

"It's a small market right now, but that's where a lot of the growth will be coming from in the next few years," says Brad Hoopman, a technology analyst with Philadelphia-based PNC Small Cap Fund.

With increased memory and the speed of the new system, more consumers will be turning to the Internet for entertainment and information. They might need high-performance modems made by Microcom and U.S. Robotics.

One warning from the analysts: software makers that aren't ready for Windows 95 when it arrives could be in for some hard times. They recommend evaluating software stocks in light of their ability to offer Windows 95 products.

"Clearly it's something that has to be thought of in the overall investment equation," advises Fred Alger's Mr. Swei. "When considering the technology stocks, you've got to think about whether the product can compete or will it just become irrelevant" in the post-Windows 95 world.

             Who May Benefit From Windows 95
COMPANY (Symbol)              HOW IT BENEFITS
CompUSA (CPU)       Computer superstore retailer should 
                    see a pickup in traffic with customers 
                    looking for the Windows 95 upgrade
Integrated Silicon  As Windows 95 requires more memory, 
Solutions (ISSI)    computer makers will likely be placing 
                    orders with this SRAM memory-chip maker
Symantec (SYMC)     Windows 95 users will need new 
                    utilities (such as backup and 
                    virus-protection programs) from 
                    Symantec, which controls about 75% of 
                    software-utilities market
Diamond Multimedia  Graphics-board and multimedia-chip 
(DIMD)              maker will see more orders as consumers 
                    want to take advantage of all of 
                    Windows 95 capabilities
Microcom (MNPI)     More consumers will want high-end 
                    modems and communications products for 
                    faster on-line service (particularly 
                    if Windows 95 comes with Microsoft 

Friday Market Activity

The week ended with the small-capitalization stock rally intact. On Friday, the Russell 2000 index of small-cap stocks was up 0.51, or 0.18%, at a record 280.80, and the Nasdaq Composite Index, at a record 908.65, rose 5.97, or 0.66%.

The New York Stock Exchange Composite Index rose 1.20, or 0.42%, to a record 289.96, and the Dow Jones Industrial Average, at a record 4510.79, rose 14.52, or 0.32%.

Nasdaq advancing issues led decliners, 1,836 to 1,542, on overall volume of 403 million, down from 411 million Thursday.

For the week, the Russell 2000 was up 5.59, or 2.03%, and the Nasdaq composite rose 24.26, or 2.74%.

Bird Medical Technologies was up 1 3/4, or 25%, at 8 3/4 after the Palm Springs, Calif., respiratory care and infection-control products company received an unsolicited acquisition proposal from Allied Healthcare Products of $9.50 a share, 51% of which would be in stock and 40% in cash.

Earlier this month, Bird Medical signed a letter of intent to be acquired by Thermo Electron that prohibits Bird from engaging in discussions with any third-party bidders for a one-month period ending July 9. But Bird said it isn't precluded from considering other proposals and intends to evaluate the Allied offer seriously.

Medaphis dropped 8 1/4, or 26%, to 23 3/4 after the Atlanta-based company, which provides business-management services for doctors and hospitals, dislcosed late Thursday that it was the subject of a criminal investigation by federal authorities in California.

Aramed was up 1 1/4, or 14%, at 10 1/4 after the San Diego pharmaceuticals-research company agreed to be acquired by Gensia for a combination of cash, stock and contingent value rights. Aramed, which was formed by Gensia in 1991, will become a unit of Gensia, a San Diego biopharmaceuticals company. Gensia was up 1/8, or 3.1%, at 4 1/8.

Sunshine Jr. Stores (AMEX) added 1 1/4, or nearly 12%, to 11 3/4 after the Panama City, Fla., convenience-store operator agreed to be purchased by E-Z Serve for about $20.4 million, or $12 a share.

Hutchinson Technology rose 4, or about 10%, to 42 1/2 on news the Hutchinson, Minn., disk-drive component company entered an agreement with International Business Machines in which the companies will cross-license patents and work to develop certain products. Hutchinson said the combined effects of strong demand and improving manufacturing efficiencies should result in third-quarter earnings of 85 cents a share, doubling the 42 cents it made in the year-earlier period.

Finlay Enterprises added 1 1/8, or 9.2%, to 13 3/8 after Goldman Sachs raised its rating on the New York City jewelry company to "trading buy" from "moderate outperformer," citing the company's strong results so far this year.

Lakehead Pipe Line Partners (NYSE) dropped 5 1/4, or more than 17%, to 25 following a ruling by the Federal Energy Regulatory Commission that threatens to erode revenue and earnings for pipeline partnerships. The commission said Lakehead can't include in its cost of service an income tax allowance for income attributable to limited partnership interests held by individuals.

(See related article: "Abreast of the Market: Systems Reception May Affect Stocks for Months to Come" -- WSJ June 19, 1995)

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