Are there any Salvageable Computer Makers?

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

Notebooks did serious damage to desktop PCs, and now tablets are doing serious damage to notebooks. The cloud is adding salt to the wounds. Is the PC truly gone in desktop and notebook form? I think that the desktop PC has become more of a niche centered around gaming, graphics and video, and enthusiasts. The volume is not there for desktops. Most people I know only own notebooks, and many have bought tablets. Investing in a computer maker has to cause some hesitation considering the technological shift that is occurring.

I am interested in Dell (NASDAQ: DELL), which is currently hovering around $10. Dell has tried to enter other areas, but the company is not really known for anything but the computers and closely related items like servers. The company would be taking on some entrenched companies if it wanted to expand into networking anyway. If it want to try something new, I would prefer it consider emerging technologies or trying to launch a tablet.

The enterprise segment is critical for Dell, but losing the consumer segment would be a big blow. Sure it might improve profitability whilst shrinking the business, but it would be a psychological blow to move out of the consumer market. Perhaps the market would welcome it initially, but at least in the long-term I think the lack of a consumer segment would severely damage the company.

I do like Dell's cash pile of over $11 billion. That number is less impressive considering the $9 billion in long-term debt. Still, the company has a production base, and as long as they do not decide to do something completely different it should not cost much. The trickiest part will be deciding what to make. Dell does not need to change too much. It is not like the company needs to abandon desktops and notebooks. Tablets are not useful for doing work on. I know that convertible notebooks have been around for a while, but the new tablets are all about being light and unobtrusive. Convertible notebooks do not function as well in tablet mode if the point is ease of use.

Tablets might slightly alter the level of demand and the replacement cycle, but I do not think they will make the whole concept obsolete. Even now I am writing and researching on my desktop or notebook. I use both. I have a tablet too, but that is for reading articles or watching something. There is a chance that Microsoft's (NASDAQ: MSFT) Windows 8 will provide Dell with an opportunity, since that OS seems like it is more in line with work uses. It has tablets in mind, but is meant to be closer to a traditional OS than iOS. The OS might also help Microsoft close the gap that seems to have opened between it and Apple and Google.

A resurgence for Dell would also mean an improvement for Intel (NASDAQ: INTC). Windows 8 might help that company out of a sales slump, at least for the short-term, while something new and interesting is developed. Dell computers are loaded with Intel chips, so both of them should improve together. Both companies also need to discover new ways to bring in revenue, because technology is transitioning and neither of them have done much to transition with it. Dell needs to use Windows 8 to try and get a second bite at the apple to make itself known in the tablet market. Everything I have read so far suggests that Windows 8 is not Vista, which is already good news. It will be some time before its success can be properly evaluated. It can be one of those things that everyone grumbles about, but everyone still uses.

Dell launch a social media services initiative to bring in a new revenue stream. However, unless this rises in prominence it might just bring in additional revenue, but little else. Perception of the company is important for share appreciation. If the company can launch a successful tablet or notebook hybrid, then the stock will probably reflect that success. It needs to a breakout success, not just the standard results you might see of the tablets currently on Dell's site. One of those can take off, but everyone needs to hear about it.

Hewlett-Packard (NYSE: HPQ) is another company that needs to innovate. Computers make up about a third of HP's revenues, but the business is low margin. HP might not stay in the notebook business, which might be smart considering its recent troubles. The company is losing money, and there is no guarantee this will turn around any time soon. I like using the net income ttm measure since it gives you a 1-year picture. Losses these last two quarters are steep, and it is unlikely that the next two quarters will improve that drastically.

Both Dell and HP have too much debt. Dell's debt-to-equity ratio is 0.8859, while HP's is 1.245. HP's is especially a cause for concern, since I do not like it over one for this industry. I would probably put HP out of my mind, and focus on watching Dell for the right confluence of events that could lead the stock price up. Dell does pay nice dividend with a 3.18% yield, but until I was sure about the direction of the future I would not look for the dividend. The stars lining up for Dell would also signal good things for Intel and Microsoft, so keeping an eye on Dell would be efficient.

TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Microsoft. Motley Fool newsletter services recommend 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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