Notwithstanding the winning streak in 2018, the year 2019 apparently sinks to a dull period for worldwide server vendors. Recently released data on the global server market for second-quarter 2019 by International Data Corporation (“IDC”) showed that the industry saw a year-on-year decline for the first time since the fourth quarter of 2016.
According to the data compiled by the research firm, worldwide server revenues dropped 11.6% year over year to $20 billion in the second quarter while overall shipment fell 9.3% to approximately 2.7 million units.
IDC noticed deterioration in every segment with revenues of volume servers waning 10% year over year to $16.3 billion while the mid-range server dipped 4.6% to $2.4 billion. Also, high-end system revenues reached $1.3 billion, reflecting a contraction of 20.8%.
Also, x86 servers suffered a blow during the quarter. IDC noted a 10.6% year-over-year decrease in x86 server revenues, which totaled $18.4 billion while revenues from non-x86 servers witnessed a decrease of 21.5% to $1.6 billion.
The research firm observed that a decelerating purchase from cloud providers and hyperscale customers, an off-cycle in the cyclical non-x 86 markets coupled with slowdown from enterprises due to existing capacity and macroeconomic woes posed key challenges during the reported quarter.
How Are the Vendors Placed?
With respect to individual server manufacturers, there was a tie between Dell DELL and Hewlett Packard Enterprise HPE /New H3C Group for the first spot with 19% and 18% share, respectively. IDC calls it a statistical draw when the gap among vendors is 1% or less.
Revenues of Dell declined 13% year over year. Weakness in the China market is a major headwind for the company. On the lastearnings call management mentioned that they are more selective about larger deals in the region and is more focused on developing sustainable long-term relationships with customers. However, outside China, the company continues to witness growth, which is a positive.
Coming to Hewlett Packard, although revenues were down 3.6% year over year, the company witnessed an increase in the market share by 150 basis points year over year. The company is gaining traction from its strategic partnership with China-based H3C, which is a key player in the China market with a solid grip on campus switching and wireless LAN.
Inspur/Inspur Power Systems, a China-based company, held the third position with 7.2% market share. It is the only vendor to have witnessed a rise in revenues and growth in volume shipment too.
The fourth position is a draw between Lenovo LNVGY and International Business Machines IBM, generating 6.1% and 5.9% share of total server revenues each.
Lenovo’s revenues softened 21.7%. Reduction in purchase by large cloud computing customers due to excessive capacity built in the last few quarters is an overhang on the company. Moreover, lower commodity component price is inducing waning server average unit revenues, which is hurting its top line.
Moving on to IBM, the company’s server revenues declined 27.4% in the second quarter. The company did not even feature in the list of top six vendors in terms of volume of servers shipped. Nonetheless, the company’s purchase of Red Hat is likely to fortify its position in hybrid cloud computing.
In terms of volume, Dell secured the top berth with a market share of 17.8% while HPE occupied the second spot with market share of 16.3%. Inspura and Lenovo captured the third and fourth positions with market share of 8.7% and 6.7%, respectively. Super Micro and Huawei held the fifth position with 5.2% and 4.3% share, respectively.
The chart below shows the price performance of the vendors so far this year.
Is There a Glimmer of Hope?
Per a report by Dell'Oro Group, the server market will surpass the $100-billion mark by 2023, driven by increasing average selling prices of servers. The firm expects server market revenues to see a CAGR of 7% over the 2019-2023 period while server unit shipments are projected to grow at a low single-digit CAGR.
Rising hyperscale server deployments by cloud-service providers is a major catalyst. AI, edge computing, network function virtualization and other emerging trends are likely to boost demand for the servers.
While HPE, Dell and Lenevo carry a Zacks Rank #3 (Hold), IBM carries a Zacks Rank#4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report
International Business Machines Corporation (IBM): Free Stock Analysis Report
Lenovo Group Ltd. (LNVGY): Free Stock Analysis Report
Dell Technologies Inc. (DELL): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.