PC Market Continues to Melt - Analyst Blog

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U.S. technology research firm Gartner Inc. ( IT ) recently announced that worldwide PC unit shipments declined 0.1% year over year to 87.5 million units in the second quarter of fiscal 2012. Shipments were also below the prior quarter level. Worldwide shipments during the first quarter were 89 million units.

The past several quarters have seen significant uncertainty in the PC market. The popularity of next-generation ultra-portable gadgets (mainly tablets and smartphones) has taken the market by storm, diverting consumer spending from traditional desktops and notebooks. Additionally, the much-hyped ultrabooks -- the next-gen laptop -- have failed to woo end-users, as expected.

Gartner estimates indicate that Hewlett-Packard Co. ( HPQ ) saw unit shipments slipping 12.1%, the worst amongst the PC vendors worldwide. H-P was followed by Dell Inc. ( DELL ) with an 11.5% decline. However, impressive performances by Lenovo, Acer Group and ASUS provided some support to the metrics.

In terms of market share, H-P maintained its world leadership with 14.9%, closely followed by Lenovo (14.7%). Dell lost its third position to Acer Group (11.0%), ending up fourth with a market share of 10.7%.

In the domestic market, H-P led with a 25.0% share, followed by Dell with 21.7% and Apple Inc. ( AAPL ) with 12.0%. But Apple saw the strongest year-over-year growth at 4.3%, handily beating H-P (-12.7%) and Dell (-9.5%).

Considering the above scenario, we believe that H-P has plenty of reason to worry. While Asian vendors are stiffening competition in the world market, Apple is making life difficult at home. During the first quarter, Apple's share in the market was just 10.6% compared to H-P's 29.0%.

Research firm IDC also shares the same opinion as Gartner. According to IDC, the decrease in unit shipments came below its conservative projection of 2.1% growth.

The Ripple Effect

The weakness in the PC market has also affected other companies. Some other OEMs (original equipment manufactures) and allied industries which have their fortunes tied to the industry have also been under pressure.

H-P remains cautious about the global environment for both consumer and commercial spending for its PC segment. Management also expects the pricing environment to remain competitive. Hence, it has decided not to provide quantitative revenue or segment-level outlooks.

H-P initiated a number of strategies to deal with the poorly performing PC segment. New product launches, the decision to spin off the segment (which was scrapped), and the merger of its PC and printer divisions are worth-mentioning.

But the strategies did not work out properly, probably due to the persistent weakness in IT spending. In order to deal with the situation, H-P announced a major restructuring program focusing on reducing the cost structure and realigning the work force to create investment capacity, support growth initiatives and innovation, and enable more effective operations globally.

H-P intends to reinvest the majority of savings from head count and non-head count related actions in its business to foster innovation, particularly in cloud, big data analytics, information management and security.

Dell expects a 2-4% sequential revenue growth, much of which is expected to come from servers and storage products. At its analyst day held in June, Dell announced a $2.0 billion cost cutting program over the next three years.

The idea behind the cost-cut is mainly to shift focus from the traditional computing business to a high-margin enterprise-class software and services market. Dell has also acquired a number of cloud and software vendors over time to solidify its position in the enterprise-solutions vertical.

The lackluster PC market is forcing the two key players to shift their focus from the traditional business. These tech giants are following the trend set up by IBM Corp. ( IBM ), which offloaded its PC unit to China's Lenovo Group Ltd. in 2005.

Yesterday, Asian PC manufacturer, Acer reduced its growth forecast for fiscal 2012. But the company is somewhat optimistic about the release of Microsoft Corp. 's ( MSFT ) Windows 8 operating system. The offering could boost PC sales in the coming quarters.

Analysts are of opinion that chip-maker Intel Corp. ( INTC ) may face challenges to meet its guidance for the second and third quarters of fiscal 2012, owing to the sluggish PC market. Intel did not slash its guidance but the shares dropped 3.2% post Gartner's announcement.

Last week, Intel's archrival Advanced Micro Devices Inc. ( AMD ) lowered its second quarter sales expectations, citing weak demand in China, sovereign debt issues in Europe, as well as a sluggish U.S. personal computer market.

Microsoft has also announced cost cuts by way of headcount reduction. The decision was largely based on Gartner's announcement of slowing PC sales.

Apart from the companies mentioned above, there are some others that could be affected by the soft PC market. Hard disk drive makers Seagate Technology plc ( STX ), Western Digital Corp. ( WDC ) and graphic chip-maker NVIDIA Corp. ( NVDA ) are worth mentioning.

Conclusion

Though the current scenario looks terrible, we believe that any improvement in macroeconomic conditions and Euro issues could boost tech spending going forward. Also, the release of Windows 8 could have a positive impact on PC sales.

Recently, Gartner predicted that global spending for information technology products and services will increase 3.0% year over year to $3.6 trillion in 2012. The projection surpasses the 2.5% growth expectations provided earlier this year.

To conclude, we think that aggressive pricing by Asus and Lenovo and Microsoft's upcoming tablet, Surface, could put H-P and Dell under even greater pressure. The bets appear to be on their ultrabook offerings, where initial reaction appears softer than expected.

Currently, H-P, AMD, Apple and Microsoft hold a Zacks Rank of #3, implying a short-term Hold recommendation. Intel has a Zacks Rank of #4, implying a short-term Sell recommendation. Dell has a Zacks Rank of #5, implying a short-term Strong Sell recommendation.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AAPL , AMD , DELL , HPQ , IBM

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