Can the PC Market Get Anything Right?

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

The personal computer market can’t seem to get anything right. Research firm IHS iSuppli reported on June 27 that first-quarter shipments of notebook computers by original design manufacturers (ODMs) like Compal Electronics and Quanta, which are largely responsible for building the mainstream laptops, were worse than had been originally forecast. Shipments declined 17% from the prior quarter to 33.2 million units, plummeting 12% year-over-year.

On April 10, it was reported that PC shipments overall were the worst in years, possibly the worst on record, according to IDC. iSuppli furthers that the 17% drop from Q4 of 2012 to Q1 of 2013 in original design manufacturers was four-to-five percentage points worse than what was modeled for the quarter. The firm continues on to say the results “confirm an even more debilitated market, and the latest numbers were the worst of the last 12 quarters.”

The report displays the hardest hit notebook ODM was Quanta, which lost its top position in the industry. Quanta supplies Apple (NASDAQ: AAPL), Hewlett-Packard (NYSE: HPQ), Dell (NASDAQ: DELL), Lenovo, and other major brands with manufactured notebook products. Strength for Quanta was derived from stable notebook PC shipments to clients Lenovo and Dell.

Analyst Peter Lin of Suppli stated that a number of substantial factors contributed to the weakness in the industry, including global macroeconomic woes. Further Lin goes on to state:  "Notebook ODMs and their brand-name customers also are contending with the robust competition in the consumer market coming from smartphones and tablets.”

However, iSuppli notes factors that could potentially assist the notebook industry later this year, including an update to Microsoft’s (NASDAQ: MSFT) Windows 8, which most prominently would add a home button, a new microprocessor from Intel (NASDAQ: INTC), and the introduction of lower-priced ultra-thin PCs with new touch-enabled features.

So what?

Which companies stand to be effected most considerably by the deterioration in the PC market? Dell, Hewlett-Packard, Microsoft, Apple, and Intel are just five companies positioned to be most influenced by this troubling trend.

In Dell's fiscal year 2012, the company derived $28.3 billion in revenue from the mobile and desktop PC industries, which accounted for 49.7% of total revenue. This segment has been of particular weakness over the past year, with the mobile PC segment decreasing 19.9% with respect to revenue year-over-year, and the desktop PC segment deteriorating 8.1% over the same time period.

In the company's 2013 fiscal year, Dell generated $56.9 billion in revenue, a metric which is anticipated to fall to $51.9 billion by 2017. The profitability metric of the company is a weakness, with Dell currently possessing a trailing-12 month profit margin of 3.3%. Projections place this metric remaining relatively stable, increasing to 3.5% by 2015. The company pays out quarterly dividends of $0.08, which annually puts the dividend as yielding 2.4%. In respect to valuation, Dell does not appear vastly overpriced with a price-to-earnings ratio of 12.5.  

Hewlett-Packard’s business is also heavily dependent on the PC market, with 29.6% of overall revenue being derived from the personal-systems segment in 2012. The revenue created by the overall segment decreased 9.9% year-over-year between 2011 and 2012. Desktop PCs declined 3.4% year-over-year, while notebook PCs tumbled 6.3%.

In 2012, H-P created $120.4 billion in revenue, a statistic which is expected to fall to $107.0 billion by 2015. Presently, the company possesses a trailing-12 month profit margin of -11.6%, representing a fundamentally flawed business model. Projections display the profit margin recovering to positive territory by 2013, and reaching 5% by 2015. The company pays out quarterly dividends of $0.15, which annualized puts the dividend yielding 2.3%. On a valuation basis, Hewlett-Packard carries a negative price-to-earnings ratio.  

Unlike Dell and Hewlett-Packard, Microsoft is only concerned about selling laptops and desktop PCs that sport its Windows software. The Windows segment of Microsoft produced $18.4 billion of revenue in the company’s fiscal 2012, representing 24.9% of overall revenue for the year. Revenue derived from this segment decreased 3.5% from 2011 to 2012.

In 2012, Microsoft produced $73.7 billion in revenue, a metric which is projected to rise to $88.8 billion by 2017. At the moment, the company carries a trailing-12 month profit margin of 21.6%, displaying a relatively strong business model. Projections anticipate the company's profit margin strengthening to 30.5% by 2015. Microsoft pays out quarterly dividends of $0.23, which annualized puts the dividend as yielding 2.7%. On a valuation basis, Microsoft holds a price-to- earnings ratio of 17.5.    

Apple, like Microsoft, is heavily diversified, with a broad product portfolio. The company’s exposure to personal computers is a result of its Mac line. The total Mac line produced $23.2 billion of revenue in 2012, representing 14.8% of overall company revenue. In terms of revenue from 2011 to 2012, the overall Mac segment increased 6.6%, the Mac portables segment increased about 12.0% and the Mac desktops segment decreased 6.2%.

Apple generated $156.5 billion in revenue in 2012, a mark which is projected to rise to $222.2 billion by 2017. Currently, Apple carries a trailing-12 month profit margin of 23.5%, a statistic which is expected to decay to the 15% level by 2017. Apple pays out quarterly dividends of $3.05, which annualized puts the dividend as yielding 2.9%. On a valuation basis, Apple carries a price-to-earnings ratio of slightly less than 10.0

Intel offers a broad range of microprocessors and chipsets used in PCs, data centers, tablets, smartphones, automobiles, automated factory systems, and medical devices. The primary segment of the company’s business, the PC client- group segment, focuses on the production of chips for the PC market. In 2012, the segment generated $34.3 billion in revenue, accounting for 64.0% of overall company revenue. Revenue from this segment decreased 3.2% year-over-year from 2011 to 2012.

In 2012, the company created $53.3 billion in revenue, which is anticipated to grow to $56.9 billion by 2017. Presently, Intel carries a trailing-12 month profit margin of 19.4%, a metric which is projected to fall to 19.1% by 2015. The company pays out quarterly dividends of $0.22, which annualized puts the dividend as yielding 3.8%. In respect to valuation, Intel carries a price-to-earnings ratio of 11.8.   

Now what?

Many of these companies either have a significant presence or are desperately attempting to build a presence in the tablet market. Apple has its iPad, which, in terms of revenue generation, has grown 310.5% from 2010 to 2011 and 59.2% from 2011 to 2012. Microsoft recently launched its Microsoft Surface tablets, and tablets sporting the Windows 8 platform have been launched by Dell and Hewlett-Packard. Intel chips are regularly utilized in tablets, being integrated into all major tablets brands, with the exception of the iPad.

Just this year tablet shipments are expected to surge 68%, according to research firm Gartner. Some 201 million tablets are projected to ship this year, along with 276 million in 2014. Meanwhile, PCs are only expected to decrease in volume for years to come, as the graph below depicts.

<img alt="" src="http://g.fool.com/editorial/images/54318/500_large.png" />

The future growth of the industry will be in tablets, and investors will have to be aware of the companies capitalizing on the growth of tablets to make intelligent investment decisions in the world of technology.

The Foolish bottom line

The PC market can’t seem to get anything right, and is a market that is deteriorating, not growing. Several major companies are set to be affected by this shift in consumer preferences from PCs to tablets, and only those companies which strategically position themselves in the tablet market will benefit from the explosive growth projected for the industry. Likewise, only those investors who strategically position themselves in these companies will reap the potential upside that is presented.

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Ryan Guenette owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, 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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