The stock was then trading at $4 and it looked like Inouye might just be able to turn Gateway around by getting rid of all the Gateway brick-and-mortar stores, working out better deals with suppliers from the far East and making Gateway a lean operating company like Dell (DELL).
For a while it looked like the story was going to play out like everyone hoped and the stock moved up through the rest of 2004 to close at a peak of $6.92 on Dec 1st, 2004, an impressive gain of over 70%. When reality set in and Gateway continued to lose market share -- thanks in part to the introduction of $349 PCs by Dell -- the stock began its steep descent, losing almost two-thirds its value to close at $2.44 on Feb 13th, 2006.
Last week I looked at Gateway again, trying to fathom whether the company had reached a bottom. At a Price/Sales ratio of 0.24 and forward looking P/E of 13.56, it certainly appears that way. A closer look at Gateway reveals an interesting picture.
On the positive side:
* After many quarters of negative earnings, Gateway has shown positive operating earnings over the last three quarters.
* Gateway posted a 9% increase in revenue in its latest quarter and a small gain in market share from 6.4% to 6.8%
* High insider ownership with founder Ted Waitt holding more than 20% of the company.
* Gateway currently carries $635 million in cash and short-term investments on its balance sheet when compared to $350 million in short and long–term debt.
On the negative side:
* Gateway’s CEO Wayne Inouye, who was supposed to turn the company around, resigned last week.
* A large portion of Gateway’s positive earnings are a result of the antitrust lawsuit settlement that Gateway reached with Microsoft (MSFT) in April 2005 where Microsoft agreed to pay gateway $150 million over four years.
* Gateway faces the same cut-throat competition in its electronics business as it faced in its computer business.
* With Inouye’s departure, the strong relationship Gateway has enjoyed with retailers such as Best Buy could be in jeopardy.
The jury is still out on Gateway, and I would rather stay on the sidelines than get embroiled in the company's turmoil.
GTW 1-yr Chart
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