This Drumbeat of Doom is Missing a Stick
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are certain predictions that have been become popular to make for years now. One prediction is that eventually the only computer we will use is our smartphone. I've also heard that eventually society will go completely paperless. A popular argument that has gained speed in the last year or so is the coming demise of the PC industry. While some people think this makes sense, the actual numbers don't appear to bear out this prophecy. Understanding why the PC is going to be around for a while is crucial to knowing why certain companies should be attractive investments.
Before I get to specific companies, let me mention it was Michael Lewis who in a recent article on Fool.com got me thinking about this topic. His article was centered on the idea that many investors are writing off hard drive manufacturers, specifically Seagate (NASDAQ: STX), because of the impending death of the PC industry. He said that it has been years now that the death of the PC industry has been predicted. However, the facts show a very different picture than the drumbeats of doom.
How is this for a fact: PC shipments are actually growing again. According to Gartner research, in 2010 the total number of PCs shipped worldwide was about 350.9 million. In 2011, this total climbed to about 352.8 million. According to IDC research, 2012 PC shipments are expected to reach about 367 million, representing about 4% growth on a year-over-year basis. The same company expects PC shipments between 2013 and 2015 to grow by at least 6.5% each year.
These numbers certainly seem to refute that conclusion that this industry is on death's doorstep. This reminds me of a comment that Peter Lynch shared about the housing market back in the 1980s. He said that while news outlets were crying over the fall in home prices, the median price of a house was actually increasing. His said sometimes the quiet facts tell a different story than what you hear people shouting. But I know what you are thinking: what about tablets?
Over time tablets may change, or the line between laptops and tablets may blur, but PCs will continue to dominate for creating content. Word processing, using a spreadsheet, of even simply looking at multiple web pages at once all remains in the domain of the PC. In fact, I would argue that tablets could be considered add-on computers instead of replacements.
The pricing difference between a tablet and laptop is just too close. A customer can walk into almost any electronics retailer and pick up a laptop for $399 or even less. When it comes to capabilities, a $399 laptop blows away any tablet on the market. Think about it this way: while media is moving toward digital distribution, how much of this can reside on a 16 GB or even 64 GB tablet? Until cloud storage becomes so pervasive that customers don't think about what they store on their hard drive, PCs will stick around. So the ultimate question is, who wins if PCs are going to be around for a while?
The first two winners I see are the dominant hard drive makers Seagate and Western Digital (NASDAQ: WDC). If IDC research is right and 400 million PCs ship next year, many will carry either a Seagate or Western Digital hard drive. Even the push toward Ultrabooks won't necessarily hurt these manufacturers. Dell for instance, offers three signature Ultrabooks, and two of them use a standard hard drive. Hewlett-Packard offers 11 different Ultrabooks, and eight of these models use a standard hard drive.
With Seagate and Western Digital paying yields of 4.23% and 2.62%, respectively, investors are being rewarded while they wait. Both of these companies sell for ridiculously cheap multiples of less than 5 times projected earnings and generate significant free cash flow.
Two other winners have to be Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC). Say what you want about either company, but there is a very good chance that the majority of the 400 million expected PCs next year will ship with both Intel inside and a Microsoft OS installed. Microsoft currently yields over 3% and sells for less than 10 times earnings. Intel yields nearly 4% and sells for almost the same multiple as Microsoft. If the PC market grows over the next several years, as both IDC and Gartner expect, these two companies are nearly impossible to bet against.
In the end, tablet and smartphone manufacturers have a lot of work to do if they ever hope to unseat the PC as the primary content creation tool. Companies like Intel, Microsoft, Western Digital, and Seagate don't necessarily have to have their hand in tablets and smartphones to be successful. The PC isn't dead and contrary to popular belief doesn't appear to be going anywhere anytime soon.
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MHenage owns shares of Intel and Seagate Technology. The Motley Fool owns shares of Intel, Microsoft, and Western Digital. Motley Fool newsletter services recommend Intel. 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.If you have questions about this post or the Fool’s blog network, click here for information.