Microsoft Corporation (NASDAQ:MSFT), worth more than $400 billion, is the third-largest company in the world. Intel Corporation (NASDAQ:INTC), with a market cap of $150 billion, is the thirty-sixth largest public company.
Yet simply being massive doesn’t give shareholders any guarantees. Both MSFT and INTC are facing a trend that’s not going away … and it will hurt their business.
The trend has been under way for a while, and truth be told, people have been worrying their little heads off about it for years: It’s the slow, inevitable death of the PC.
But just because we know about falling PC sales doesn’t make the risk it poses to MSFT and INTC any less potent. Especially since a new report from International Data Corp. lowered its PC sales projections for the year pretty markedly.
MSFT, INTC: Brace for Pain
IDC, which in its last report forecast global PC shipments would fall 5.3% in 2016, now expects global PC shipments to slump 7.3% from 2015. The revision comes after PC shipments fell 12.5% in the first quarter, 1.2 percentage points worse than the 11.3% the IDC had forecast.
Sure, IDC doesn’t have a crystal ball, but the fact that it sees desktop and laptop demand slumping so dramatically likely means multi-billion-dollar hits to MSFT and INTC.
In 2015, when PC shipments fell 10.6% globally, the lack of demand showed in the numbers for INTC, the ubiquitous semiconductor company whose chips are found in so many PCs. Notebook platform unit sales fell 9% at Intel, while desktop platform unit sales fell 16% last year.
Overall, revenue in the Client Computing Group, Intel’s largest segment and the segment that PC chip sales fall beneath, fell 8% in 2015, from $33.21 billion to $30.65 billion.
INTC, whose only other meaningful operating segment is the Data Center Group, wasn’t able to make up for this revenue slump across its other lines of business. CCG accounted for 58% of revenue, while DCG accounted for 29%. No other segment brought in more than 5% of sales.
And while MSFT is more diversified than Intel, thus is better able to weather the hit from a soft PC market, it still hurts.
Microsoft’s Devices & Consumer Licensing revenues fell $4.6 billion, or 23%, in 2015, as the software giant took in less money from Windows licensing. It acknowledged that “declines in the business PC market” were partially to blame.
When it comes to Microsoft and INTC as they relate to PCs, remember that INTC is less insulated from the decline than Microsoft, which has plenty of other meaningful sources of revenue like the commercial cloud, Office subscription revenue, gaming and search.
But it’s a double-edged sword: MSFT stock also trades for a much higher multiple than Intel, going for roughly 40 times trailing earnings. Intel’s price-to-earnings ratio is just 13.6.
Either way, with both stocks down between 6% and 7% to start the year, don’t expect any assistance to come from the languishing PC industry.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
