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Investing in the Evolving Technology Arena
Recent earnings releases from Apple (AAPL), Hewlett Packard (HPQ - Free Analyst Report), and Dell (DELL) seem to suggest that demand for personal computers (PCs) is on an upswing. Shipments to both the corporate and consumer markets rose at a healthy pace since the beginning of this year and may indeed signal a PC refresh cycle where individuals and organizations are replacing outdated machines for computers with faster processors, larger memory capacity, and the latest operating systems. Still, while customers opened their wallets and purchased desktops and laptops, we also witnessed a sharp increase in sales of devices such as netbooks and tablets.
Leading the charge has been Apple, who sold over three million units of the iPad tablet since the device hit the market in April. From the iPod, iPhone and now iPad, Apple has created a loyal customer base that is willing to shell out cash for its desktop iMacs and laptop computers. Instead of cannibalizing sales of its Macintosh products, the iPad is likely giving Apple’s customers more reason to purchase these computers. What’s more, we believe that the company’s strong brand name and popular lineup of products should continue to drive this trend in the years ahead.
In addition, we think that Hewlett Packard, Dell and other manufacturers will have a tough time keeping up with Apple’s pace. Specifically, although sales of netbooks ought to continue rising in the year ahead we believe that demand for desktops PC’s and laptops will not be as strong, especially if the economic recovery loses steam. At that point, computer manufacturers and retailers will probably face a double-edged sword of slimmer profit margins from lower-cost devices and the need to reduce the selling price of desktops and laptops even further in order to remain competitive. Businesses may also be more inclined to upgrade their current systems instead of purchasing new machines.
In our view, the greatest threat to the long-term growth of desktop PC’s is the proliferation of mobile devices. We think that as time progresses, tablets will likely have even more enhanced Web capabilities, a wider array of features, and better operating systems. Within the next 3 to 5 years, netbooks may be squeezed out of their niche market by tablets and lower-priced laptops. Due to Apple’s recent success HP, Dell, Samsung, and Asus, along with other computer makers, will likely step up their efforts and put out a wider array of tablet devices. Though the commercial market will probably continue to purchase desktops for business use, individual consumers could well be more focused on the tablet and laptop markets.
For investors seeking to minimize the risk of a decline in desktop sales in the coming years or are unsure about which manufacturers would most benefit from a rise in laptop or tablet sales, we would advise them to consider the companies that provide the key software and components for these machines. In particular, semiconductor giant Intel (INTC - Free Analyst Report) is the leading provider of the microprocessors in the world. Its chips power the computers of basically every maker on the market and therefore, should benefit from an increase in demand from the overall space. Meanwhile, although Apple is steadily strengthening its position in the global PC arena, it currently only holds just about a 10% share of the market. The OSX operating system, which it uses solely, is installed on only a fraction of computers worldwide and is a distant second to Microsoft’s (MSFT - Free Analyst Report) Windows suite of offerings. Thus, we do not foresee Microsoft’s dominance ending anytime soon.
All told, even if the PC refresh cycle does not fully materialize in the near term and technology spending by businesses tightens again due to lingering economic uncertainties, investment opportunities may still present themselves with companies such as Intel and Microsoft. Over the long haul, those computer makers that can capitalize on the trend of rising tablet and laptop sales, which will probably be dependent upon the superiority of their products, should witness the healthiest gains in share prices. In the PC market it remains to be seen if Hewlett Packard, Dell, Acer or one of the other manufacturers will take the lead. For Apple, a pullback in its share price, which has skyrocketed over the past year, may provide a particularly attractive opportunity for those wanting to invest in a company with solid growth prospects.