by David Eller, Investment U Research
Tuesday, January 22, 2013: Issue #1953
So, is the era of the PC finally over?
Last week, Gartner published PC-unit growth estimates for the fourth quarter, showing a decline of 5%. This concern was supported by Intel’s (Nasdaq: INTC) December quarterly results, showing a 6% decline in its PC business.
Clearly, there’s a shift occurring as people choose tablets over laptops. But I believe the PC isn’t dead – it’s just sleeping. And more importantly, there’s still a place to profit.
When I was getting my computer science undergraduate degree in the late 1980s, our main programming language was COBOL. After graduating, I never touched it again. Technology evolves… And just as applications once written in COBOL shifted to C++ and eventually C# or Java, the market for hardware evolves as well.
Compared to a tablet, laptops are still heavy and get poor battery life. Commuters were the first to convert, because you just can’t use a laptop on a subway. Then, as third-party keyboards, from vendors like ZAGG (Nasdaq: ZAGG), made tablets an alternative for note taking, laptops became less visible on campuses.
But you can’t get around the fact that you can’t do the same things on a tablet as you can on a laptop or desktop. Tablets are better for consuming content rather than producing it. It’s true that I’m writing this article by dictating to Siri on my iPad. But for any graphics or tables, I need to use PowerPoint or Excel.
So what does this mean for the PC market? Well, where people once had multiple PCs, the number of PCs per person is likely to shrink. You’ll still need a business computer but maybe you won’t need to buy that laptop. The PC market is going to have to find a new level.
The PC business is mature and maybe even declining in size, but that doesn’t mean there aren’t opportunities to pocket some dough. Dell (Nasdaq: DELL) potentially going private is one example. If the market doesn’t reward a stock for generating piles of cash, somebody will eventually come and buy the whole company, rather than just a few shares.
DELL’s $0.32 dividend offers a 2.5% yield. And if it’s taken out by Silverlight at $13.50 in the next year, you’ll see 5% share price appreciation. It’s not one of the 10-baggers that you’ll brag about to your golf buddies, but it looks much better than the 1.9% you are getting for investing in a 10-year treasury bond.
Shares of HP (NYSE: HPQ) offer a 3% dividend. And with businesses in the printing, PC, server, services, storage, networking and software industries, it’s ripe for a restructuring. If there’s one thing Wall Street likes, it’s layoffs – but the timing is uncertain. CEO’s justify large salaries by managing large businesses, and I just don’t trust Meg Whitman to unlock the value in HP by breaking it apart.
Our favorite stock in the PC sector is Intel. It’s the supplier to Dell and HP, as well as Lenovo (OTC: LNVGY). After reporting earnings this week that were in line with expectations, Intel traded off by 6% and is now offering a yield of 4.2%. This is a decent yield to be paid while you’re waiting for Intel to increase its presence in mobile devices – or for one of the PC vendors to build a credible convertible laptop.
The stock took a hit this week because the company stated that it would continue to invest in its core businesses and guided capital expenditures ahead of what analysts were expecting. Since the company is trying to build a presence in mobile and has visibility into design wins, it seemed like a good idea. But some analysts didn’t like it. On the flipside this week, Moody’s issued a note on January 17, chastising HP for neglecting to invest in R&D over the last six years. Analysts always find something to complain about…
Microsoft (Nasdaq: MSFT) is another option, but one that is likely to have baggage over the next few quarters. The dividend is yielding 3.4% but is likely going to have a difficult earnings call we wouldn’t want to get ahead of. Numbers will likely be in line on the strength of office and corporate licensing agreements. However, the failure of Windows 8 and the mispricing of the “Surface” tablet are likely to put pressure on the share price, as the expectations for growth from these products evaporates.
Microsoft had estimated that it would sell two million units of the surface tablet in the first quarter shipping, but analysts think that the number will likely be closer to one million. Compare this to Apple (Nasdaq: AAPL), which sold three million units of its newest iPad in the first three days it went on sale in November. We would wait to consider buying Microsoft until analysts begin to speculate about a dividend increase as we near the annual meeting in July.
The PC market isn’t dead. But after three decades without competition, there is now an alternative: the tablet. DELL has declined from a share price of $26 in July 2000, to $8.70 in October 2012. But as investors look at cash flow rather than growth, companies managing their businesses responsibly will find a bid.