by Tom Taulli | August 24, 2012 7:15 am
The desktop computer was more hobby than business until the early 1980s, when International Business Machines (NYSE:IBM) launched its PC. That event helped create a technological revolution, and gave birth to one of the world’s largest markets.
But that market is under immense pressure of late, as illustrated by the dismal earnings reports from Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL).
It’s true that part of the weakness is from the slowing global economy. While many might complain about things like computer speed, unless your hardware outright fails, a new PC is an easy investment to put off.
Which in turn demonstrates another problem — market maturity. Most of the movement isn’t coming from finding new PC customers, but from people replacing old computers.
Yet, the biggest issue for the PC world isn’t global sluggishness or a saturated market … it’s the mobile revolution.
According to IDC, the number of tablets is expected to boom from 107.4 million units shipped this year to 142.8 million in 2013 — and a whopping 222.1 million units by 2016! And smartphones — which don’t wholly replace computers, but have cannibalized many of the tasks (social media, search) traditionally performed on PCs — are expected to ship 1.16 billion units in 2016, more than double the number shipped in 2011.
Of course, the company that anticipated and most deftly acted toward this megatrend is Apple (NASDAQ:AAPL), whose iPhones and iPads have become the gold standard while many old tech operators are still trying to catch up.
A key reason is that these companies do not have the right talent and infrastructure to build effective mobile platforms. Remember, Apple had a huge advantage thanks to its long history with the iPod.
Hewlett-Packard probably is the most vulnerable of the old tech operators, as it dumped its tablet last year. Dell, too, has launched a variety of failed offerings. But it’s not just PC makers who could get left behind — a number of members of the PC ecosystem could be rattled by the winds of change.
Iconic chipmaker Intel (NASDAQ:INTC) hasn’t just been spinning its wheels. The company has been using its cash flows to diversify its business into software, such as with its acquisition with McAfee, and it has positioned itself to benefit from the cloud-computing revolution, which will increase demand for servers.
But while those moves should help diversify its business, a majority of Intel’s revenues still come from the PC business. Intel does have a robust pipeline of mobile-centric chips, which could help combat the company’s expected sluggish growth. But their success is a huge “if,” especially considering Intel’s lack of success with mobile systems in the past decade, as well as the fierce competition posed by the likes of Samsung and Qualcomm (NASDAQ:QCOM).
Real America Index member Micron Technology (NASDAQ:MU) manufactures memory technology for PCs and consumer electronics devices.
And it’s a brutal business.
Micron has not only had to deal with meager PC demand, but commodization. What really differentiates one memory chip from another? Not much — and as a result, it is extremely difficult to maintain margins. Especially in an equally fierce competitive environment that also includes Samsung, as well as SanDisk (NASDAQ:SNDK), Toshiba and others.
And the icing on the cake? The company lost longtime CEO Steve Appleton earlier this year when he was killed in a plane crash.
Micron has struggled during the past five years, with an annual average loss around 10%, and MU has fallen roughly 20% since Appleton’s February death.
On its face, Seagate Technology (NASDAQ:STX) has a lot to like. Despite doubling through two-thirds of 2012, it’s still only trading at 5 times earnings — and that’s with a juicy 3.9% yield!
However, investors should note that Seagate got a huge helping hand from the heavy flooding in Thailand last year, which hit primary rival Western Digital (NASDAQ:WDC) hard while leaving STX less disturbed. But that trend is temporary, and the markets have been getting back to normal, which could make it more difficult for STX to keep up the heady results. Same goes for the slowing global economy.
Seagate also will face long-term headwinds as the PC tide turns — as demand drops off, sales for hard drives should follow. The storage industry is also undergoing some major new changes, with a focus on flash memory. Seagate is trying to make the transition, but it faces entrenched rivals like Fusion-io (NYSE:FIO).
To remain competitive, Seagate might have to get aggressive with acquisitions — and if that’s the case, the price tags won’t be cheap, plus it will face the troubles inherent with integrating fast-growing companies.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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