Looking at the Threat of $99 Computers

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Google (NASDAQ: GOOG) is accelerating its disruption of the computing model. In the smartphone space, Google released a no-contract Nexus 4 device that sells for less than half the price of an Apple (AAPL) iPhone or Samsung’s Android devices. If the Nexus 4 was more available, Google could have very well pressured other device makers in lowering the cost of their no-contract prices.

In the desktop and laptop computing space, Google is selling a $99 Chromebook to teachers this holiday season. When the Chromebook 5 was made available last year, it started at a price of $429 in mid-2011. It may now be had for far less, and includes hardware, management, and support. Although this price is limited to teachers, it represents a nearly 77% price drop. The offer also helps solidify a position for Google’s system in schools, at a time when Apple is promoting its tablet there, too. Microsoft (NASDAQ: MSFT), whose profits depends largely on Office software and operating systems, could face a slow but certain erosion in its client/server business model. Worse still is that Microsoft’s cloud computing solution (such as storage on the cloud, social networking, office on the web) could be less appealing than Google Docs.  

Investors, including this one, previously anticipated Windows 8 would renew interest in computers. The market anticipates otherwise: Google shares are up in 2012, outperforming that of Microsoft by almost two-fold:

 

(Chart source: Yahoo Finance)

In the near-term, growth in PC sales should be expected to be flat at best. In the chip space, Intel’s (INTC) lowered forecast, while TSMC (TSM) lowered its capital budget of $9 billion, down below $10 billion. As for Microsoft, investors should not expect Surface RT device sales to be remarkably high. When Surface Pro is released early next-year, its high pricing could turn off consumers.

Below, Intel shares are down over 10% in 2012:

 

(Chart source: Yahoo Finance)

There is still hope. Hope lies in patience.

Although Ultrabooks launched with fanfare last year but failed to gain traction, Windows 8-based and Linux-based Ultrabooks may keep productivity-driven users interested. Dell (DELL) launched an XPS 13 at a price below that of a Windows-based model. Hewlett-Packard (HPQ) refreshed its EliteBook line that touts tablet/laptop convertibility.

So long as PC makers continue to innovate on their product designs, there will be consumers who will choose a keyboard-based device over a tablet. They could also choose both.

Conclusion

Intel, Microsoft, Dell, and HP are not for investors with a longer-term time horizon. Those interested cloud-computing plays should look at higher-volatility companies like Google, Amazon (AMZN), Baidu (BIDU), or Salesforce.com (CRM). For the holiday quarter, sales could surprise on the upside if consumers choose they want Windows 8 and upgrade their computers. In the meantime, low forward-P/E’s make the former set of companies a value play with tremendous upside:

The price of profit values are:

  • Intel – 11
  • Microsoft – 9
  • Dell – 6
  • Hewlett-Packard – 4

(Data source: Kapitall.com)

The magnitude of the upside will not be defined when these companies report in January, but over several quarters. 


chrispycrunch has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, Intel, and Microsoft. Motley Fool newsletter services recommend Google, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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