The 'Post-PC' Carnage Continues

By Demitri Kalogeropoulos - June 6, 2012 | Tickers: AAPL, DELL, DLB, HPQ, LOGI | 0 Comments

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The quick rise of tablets has given a range of tech companies a bogeyman to blame while announcing soft sales numbers lately. At times this earnings season it seemed that everyone, from PC manufacturers like Dell (NASDAQ: DELL) to peripheral providers like Logitech (NASDAQ: LOGI) and even sound expert Dolby (NYSE: DLB), were nodding in the direction of the Apple (NASDAQ: AAPL) iPad when investors asked what's behind the weak figures they were reporting.

Not only have these companies' sales taken a hit with the shifting PC landscape, but it looks like investors have lost faith in many of their businesses and are abandoning their stocks in droves. I think only some of that selling is warranted. Below, I take a look at the prospects of these tablet victims as they adapt to the "post-PC" environment, finding one name that stands out from the bunch as laughably oversold.

Its just a giant iPhone

First, lets quickly survey the damage. The tablet industry (read: iPad) was born just two years ago. At that time, it wasn't clear exactly where tablets fit into the tech landscape. They did less than a notebook and more than a phone, but was there really room in consumers' lives for a third device? The tech world said no, but customers screamed "yes!" and the result has been a significant shift away from notebook and desktop spending and into tablets. For this year alone, with PC sales flat, tablet sales are expected to double to 120 million units.

The lion's share of that growth will go to Apple, with the resulting pain spread out between various other tech players. But among those unfortunate companies, there's a wide range of readiness for the tablet onslaught. And there's even one company that looks set to recover completely from the PC industry's tablet quake.

Nothing personal

Unfortunately for Dell investors, that company isn't Dell. The buzzword in its latest conference call was "challenging." Dell's notebook division took a 10 percent hit in the quarter, swamping the minor revenue gains registered by the enterprise and business segments. That painful drop in revenue sent shares to lows not seen in years. The culprit? According to the earnings statement (pdf), Dell is noticing "some impact," as customers switch to "alternative computing devices, including tablets."

You don't say.

What's worse, Dell's adjustment to this new reality doesn't seem like much of an adjustment at all. The company has all but ceded the consumer/entry level device category to other players. Dell CFO Brian Gladden admitted that the competitive environment has just "forced" the company to "walk away" from that business. I understand that cutting your losses can be a wise business choice, but there's a mobile device boom unfolding right now and, inexplicably, Dell appears eager to sit this round out.

Hewlett-Packard (NYSE: HPQ) hasn't fared much better, reporting another drop in revenue from notebooks and desktop sales. The company did report better enterprise sales that helped offset the weakness in consumer products, but with a still-heavy cost structure and an underwhelming product pipeline, HP appears far from a turnaround itself. 

The supporting players

Logitech and Dolby also saw challenges to their business models from the flatlining PC market. As a producer of attachments like keyboards, mice, and joysticks, Logitech has been pummeled by the rise of a product designed with the goal of removing those peripherals from the consumer tech experience.

In response, the company shifted its product line to a strong suite of tablet attachments like speaker docks, and has placed a big bet on video conferencing as its area of competitive advantage. I think Logitech has performed well, given the circumstances, but its growth prospects still appear to be permanently impaired.

Which brings me to my pick for most likely to recover from a tablet beat-down: Dolby.

Up until the tablet boom, Dolby derived a growing source of revenue from PC sales by delivering high-quality sound for DVD playback. Tablets removed that growth source. But unlike for the above companies, Dolby's wound looks temporary. Here's three reasons why:

• Windows 8 - Dolby's recent agreement with Microsoft means that the company's sound technology will be incorporated in all Windows 8 PCs and tablet, providing licensing fees for each device that's sold with that operating system when it's released next year.
• Mobile Growth - The company has only mid-teens penetration in providing audio for mobile phones, leaving plenty of room for growth as demand for high quality sound spreads to smaller devices. 
• Cloud Services - Dolby may not have made its way into the devices in consumers' pockets yet, but it sure has locked up the companies that broadcast to those devices. Netflix, VUDU, Amazon, Apple, HBO Go, and CinemaNow are Dolby clients. How long could it be before devices, including - Apple and Android - follow that services lead?

But, thanks to the depressed mood in the industry Dolby is still selling for just 15 times earnings. And shares are 40 percent off from the highs reached only 18 months ago. That's crazy. Like plenty of companies, Dolby was hurt by the tablet boom. But the company has adjusted, and its growth path is clear.

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