by Tony D’Altorio, Investment U Research
Friday, January 7, 2011
This new year, technology investors should embrace the old adage: “Out with the old; in with the new.”
In other words, don’t stay wedded to one particular specialty or stock. Technology changes way too fast, leaving booming businesses faltering within a few years’ time.
Take computing. New industry forces seem ready to pass over the old guard even now.
Consumers continue shifting away from traditional technology. Forget buying a Dell (Nasdaq: DELL) computer, with an Intel (Nasdaq: INTC) processor, Seagate (Nasdaq: STX) hard drive, Logitech (NASDAQ: LOGI) mouse and keyboard, Microsoft (Nasdaq: MSFT) Windows operating system and Adobe (Nasdaq: ADBE) media editing software.
The same goes for processors based on technology from ARM Holdings ADR (Nasdaq: ARMH) and the Android operating system from Google (Nasdaq: GOOG) with flash memory. Devices that feature those don’t need mice, keyboards or packaged software since they stream services over high-speed connections.
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Jim McGregor, chief technology strategy at the InStat research firm, sees 2011 as a year of consolidation. He predicts it will be “the beginning of the end of several technologies and high-tech companies.”
That includes Dell, which could have about two-thirds of revenues and half of its income-operating base at risk from declining PC and server growth this year. That’s due to consumers buying tablets over notebook PCs, and businesses buying cheaper desktop machines that run applications and services from “clouds” of data center servers.
Likewise, Intel has its challenges from this point onwards thanks to the tablet. And the company admits it has a mere modest share in that market.
Its PC customers are also beginning to opt for chips from ARM Holdings over its x86. Even Microsoft may start enabling Windows for Intel’s competition.
Rich Beyer, CEO of Freescale Semiconductor, has noted that change. “There is a shift taking place. As smart mobile devices proliferate, the market will open up and ourselves and other semiconductor and operating system companies will be sharing in what has effectively been a pure PC x86 Window market until now.”
Analysts at Nomura forecast notebook sales in 2011 falling by 34% to 25 million units. The same goes, they say, for the entire PC chain.
So it doesn’t look good for non-tablet part makers like Seagate and Western Digital (NYSE: WDC) hard drive makers, and makers of mice, keyboards and non-touch screens.
Tablets To Begin Eating Away at PC Sales
Nomura analysts also believe the estimated 50 million tablet devices being shipped this year will start eating away at PC sales.
That will then speed up the change already occurring in the computing supply chain. That includes retailers, where consumers buy their “computers” from a Verizon (NYSE: VZ) store rather than Best Buy (NYSE: BBY), to the software industry, where people download apps and services over high-speed connections.
Jen-hsun Huang, CEO of chipmaker Nvidia (Nasdaq: NVDA), says this year will be one of “superphones” and tablets. While the PC will remain important, he says, “everyone had better be well-positioned in mobile and cloud computing, because that’s where the new growth is coming from.”
Putting its money where its mouth is, the traditional graphics card maker has diversified with Tegra processors for mobile devices and Tesla units for high-end servers.
The battle between the old and the new, the PC and the tablet, has a fairly obvious ending. However, it certainly won’t end overnight.
ARM Holdings CEO Warren East believes “there’s no way we’ll see PCs disappear over the next five years or so” since they offer “different functionality.” Plus, he knows they won’t go down without a fight.
Intel, for one, is launching its new processor at the upcoming Consumer Electronics Show in Las Vegas. The chip combines graphics and general processing in the same space.
The company believes the extra computing power offered will allow PCs to offer more than tablets. This includes gesture recognition, which may trump touch screens.
Expect the war to rage on for several years. But while over 1 million notebook and desktops sell per day now, tablet devices will probably win out in the end.
Technology investors need to prepare for that by removing companies like Dell and Intel. Their portfolios will be much better off with shares of Apple and ARM.