(FORTUNE Magazine) – In its typical lemming-like way, Wall Street can't gush enough about personal computer makers. Consumers are buying, costs are low, profits are strong--what's not to like? Well, a few things, actually, like a distribution pipeline clogged with inventory and a collection of Japanese electronics giants entering the already crowded PC market.

Word from most brokerage analysts goes something like this: Don't worry, computer demand is insatiable, and the Japanese know so little about the PC business, they're doomed to failure. This is all very nice and good for the self-esteem of Silicon Valley, but Japan is "the country that obliterated our color TV industry, took a huge chunk of our auto industry, and clobbered our stereo business," says Jim Melcher, of Balestra Capital in New York. Melcher might also mention that a Japanese company (Toshiba) sells more laptops in the U.S. than anyone else. "At worst, this is a bloodbath," he says. "At best, the stocks aren't going up next year."

Melcher, one of the very few money managers willing to go public admitting he's bearish on such a popular industry, says the current euphoria over PC stocks reminds him of the love investors felt a year ago for memory-chip makers like Micron Technology. Back then, if anybody told you that prices of memory chips would plunge 90% over the next 12 months, with Micron's stock falling by nearly as much, you would have said they were crazy.

Remember? Demand for chips was strong, supply was tight, and Wall Street couldn't have been more bullish. But as most investors watched the stocks and chanted that old supply/demand mantra, Melcher and a few others closely followed chip prices. When those prices started to soften, the bears told anyone who'd listen, which was no one. "I looked like an idiot," says Melcher, recalling the pain of watching stocks rise despite fundamentals that appeared to be falling apart. But he didn't look so dumb for long. Within months, adds Melcher, as the price decline accelerated, "I began making a lot of money."

Which brings us back to the PC business. In the best of times it's a lousy way to earn a buck. Successful PC makers are merely glorified assemblers who have a knack for marketing. They really do nothing more than wrap metal boxes around components that anybody can buy. Lately they've looked surprisingly good, with unexpectedly strong earnings, prompting analysts to reiterate their "buy" recommendations. A closer reading of those earnings, however, shows that the collapse of memory chip prices played a big role. Suddenly, PC makers could install more memory for less money, and still have a cushion against price cuts.

The ever lower price of components is one reason so many analysts today remain so psyched about the outlook for PC makers. The trouble with this reasoning is that if prices continue to fall, the impact won't be as great. It's one thing if memory chip prices fall from $19 to $2; once they're at $2, there isn't much vertical drop left.

Not only has the rate of decline for chip prices slowed, but PC sales are decelerating a bit too. According to Dataquest, growth this year in the U.S. is expected to come in at 15%, compared with 21.5% last year and 26% in 1994. Those aren't good numbers for companies that need enormous volume to make money.

If you also have the entry of several big Japanese competitors, which will take a win-at-any-cost approach to the market, you wind up with real trouble. Sony recently launched a line of home PCs; Toshiba's new desktop machines are snazzy looking and competitively priced; Hitachi and Fujitsu are now in the market too.

American PC makers, at least publicly, aren't worried about the future. "We have respect for new competitors," says Richard Snyder, president of Gateway 2000, "but they're just another name PC maker." Some industry experts, like Seymour Merrin, of Merrin Information Services in Palo Alto, say that new technology will force lots of users to buy new PCs, thus keeping overall demand high.

The optimists may be right--U.S. PC makers may happily gather higher profits for years to come. But if economic history teaches us anything, it's that profitable markets attract competition, prices drop, and the most lucrative products turn into commodities. In high tech, the process can happen faster than anybody thinks. Just ask last year's investors in Micron.

HERB GREENBERG is a business columnist at the San Francisco Chronicle.