Buying In Computers: Is It Worth It?

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A look back gives a glimpse into the future. This piece from the 1960s makes some points about this tech sector that are still relevant today.

The potential for the computer industry is huge. In just 10 years between 1951 and 1960, sales of large-scale computers have grown to about $1.5 billion. By 1965, the market is expected to skyrocket to some $4 billion and to about $8 billion by 1970.

Despite their glamour, electronic computers haven't proved profitable for their manufacturers, with the exception of IBM. Makers of giant computers like Sperry Rand have been under particularly heavy pressure because of heavy research and development expenditures. An additional burden of financing has been imposed upon the computer industry by the strong trend toward leasing.

At this point, according to the New York Herald Tribune, "more than three-quarters of all the computers in operation are leased and there seems little likelihood that this ratio will change for some time to come. When costs come down, the computer producers will expand the limits of their market but for the moment they are perfectly content to have most of their dealings with the government and the big corporations."

Development costs on the computers have been huge and, with the notable exception of IBM, probably no other company has been able to make money on them. Sperry Rand's Univac, for instance, is still losing substantial sums, though its sales are up.

Commanding over three-quarters of all computer business, IBM, of course, will be the chief beneficiary of the expected profit breakthrough. Bluest of all blue chips, it is the most popular stock not only with rank and file investors, but also with professionals. It is found in the portfolios of some 75 investment companies and mutual funds, with shares valued at $170 million, more than their investment in any other single issue.

IBM has won this top recognition largely through its unique ability to buck the normal corporate pattern, accelerating growth despite its increased size. It is common knowledge that as company size increases, growth rate tends to slow. That has happened to all the so-called blue-chip companies. But IBM is the exception. It has more than doubled itself every five years, as is commonly believed, though doubling in five would be quite a growth rate for a company of its size.

It was only between 1946 and 1951 that it took IBM that long to double sales $120 million to $267 million. The next doubling, to $564 million by 1955, was achieved in four years, and the next, to $1,172 million by 1958, in three years.

And even this progression has been overshadowed by the acceleration in earnings and dividends. Over the three periods, IBM registered successive improvements in per-share earnings of 29, 77 and 95 per cent and, in dividends, of 16, 26 and 67 percent. IBM's annual growth rate of 20 per cent has dwarfed the nine percent of its two nearest competitors, Burroughs and National Cash Register.

There is no question that at their current price range, computers are still a quality or class market, which leaves computer makers free to tinker with their equipment and to improve it all along the line. There's been no freezing of design such as would be dictated by the need to cater to a mass market. Thus, greatly improved memory drums and a host of other new technical wrinkles have made the machines faster and more reliable.

The names and major players may have changed, but the premise still holds true. Investing in the tech market may hold the key to vast potential for small and large investors alike.

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