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5 Technology Stocks Battling the PC Market Slump

These days millennials eat, drink and sleep with their cell phones. This implies that smartphones are replacing older PCs. Computing is not about computers any more. Consumers are choosing tablets over PCs, thereby ushering in a range of mobile devices replacing traditional PCs. The future of the PC remains grey after slow sales in 2015, according to research firm IDC’s market report. Even the release of a new version of Windows isn’t doing much to help what was once the dominant sector of personal computing.

According to IDC’s 2015 report, PC shipments are expected to contract 4.9%, worse than the research firm’s earlier forecast of a decline of 3.3%. The decline in global PC shipments is largely due to lower-than-expected demand for desktop and portable PCs.

What’s worse, IDC now expects global PC shipments to be 293.1 million units in 2015 with further declines in the long run (until 2019). In dollar terms, the PC market touched $201 billion in 2014, a fall of 0.8% year over year according to the research firm, and is now expected to decline an additional 6.9% in 2015, finally dropping to $175 billion by 2019.

Why this Deceleration in PC Sales?

PC sales have dwindled over the years with consumers increasingly eyeing mobile devices such as a smartphone or a tablet rather than a desktop computer or even a laptop.

Another major reason for the decline in PC sales is related to the cost of devices. In the emerging markets, consumers are opting for relatively inexpensive tablets at the entry level. IDC anticipates PC sales in emerging markets to decline 4.7% in 2015. Also, macroeconomic weakness and political turmoil are other issues that are leading to a slowdown in PC sales.

Tech Stocks Affected by Sluggish PC Sales

Heres a quick look at five names that have been hit by the weakness:

Intel Corporation (NASDAQ:INTC)

Intel, based in Santa Clara, CA, is the world’s largest manufacturer of semiconductor products. The company supplies the computing and communications industries with microprocessors and system building blocks that are integral to computers, servers, and networking and communications products.

Weak PC sales mean less chip sales for Intel. The chip maker that carries a Zacks Rank #4 (Sell) lowered its revenue guidance for the first quarter of 2015. The company expects first-quarter net sales to be $12.8 billion (+/- $300 million), down from $13.7 billion (+/-$500 million). The lowered outlook was on account of slower-than-expected demand for business PCs and lower inventory levels across the PC supply chain.

It appears that the supply channel grabbed extra inventory of Windows 8.1+Bing systems in the fourth quarter to avail discounts and this inventory is being burned off. The lowered outlook is also at least partly on account of slower-than-expected XP-related upgrades at small and medium-sized businesses (SMBs) but Intel said that currency and macro (especially in Europe) were also factors.

The company has also been suffering for a long time due to the growing popularity of smartphones and tablet computers. However, it does have initiatives in place to diversify beyond its leading market position in PCs to new verticals including tablets, smartphones and IoT (Internet of Things).

Hewlett-Packard Company (NYSE:HPQ)

Headquartered in Palo Alto, CA, Hewlett-Packard Company or H-P is a leading global provider of computing products, technologies, software, solutions and services to individual consumers, SMBs and large enterprises, including those in the public and educational sectors.

H-P’s PC business remains an overhang. The company generates approximately 30% of revenues from its personal system segment. The continued decline in PC shipments raises a question regarding the future of the company. Also, desktop revenues in the last-reported quarter decreased 10% from the year-ago quarter, while units sold declined 7% on a year-over-year basis. As the computing business generates a significant portion of its revenues, the reduction in business volume in this segment is a major cause of concern.

H-P is also seeing secular declines due to the increasing shift to tablets and smartphones where it is yet to gain a foothold. For full year 2015, H-P which carries a Zacks Rank #4 expects revenues to decline 4% to 6%. Thus far, H-P has neither been able to dispose of this business due to its significant revenue contribution, nor make up for revenue declines in this business by generating sufficient volumes from other businesses.

The splitting of its PC and enterprise businesses announced last year may be the solution to the problem. Particularly since its traction in the cloud, security and Big Data segments will be growth catalysts, going forward.

Microsoft Corporation (NASDAQ:MSFT)

Redmond, WA-based Microsoft Corporation is one of the largest broad-based technology providers in the world today. Although software is the most important revenue source, the company’s offerings also include hardware and online services. Additionally, Microsoft offers support services in the form of consultation, training and certification of system integrators and developers.

Microsoft and PC makers are interdependent upon each other. PC makers build the computers that Windows sits on and Microsoft runs the software. Poor PC sales means less Windows Licenses sold.  

While Microsoft is now taking a cross-platform approach so its software is becoming increasingly available on Android and iOS as well, it still generates a significant portion of revenue from its legacy Windows business. Therefore, weak PC sales are severely impacting its performance during the transition period.  

In an attempt to retain its leadership position in desktop operating systems, Microsoft announced plans to offer free upgrades of Windows 10 to users of Windows 7, Windows 8 and Windows 8.1, which will add to this weakness.

Also, most of the PC component suppliers have been reducing their inventories, indicating that the PC market is unlikely to see any significant turnaround in the near term. We believe that this Zacks Rank #4 company can counter the current scenario by leveraging services such as Skype, Office 365 and Software Assurance subscriptions.

Advanced Micro Devices, Inc (NASDAQ:AMD)

Sunnyvale, CA-based Advanced Micro Devices, Inc. is the second largest producer of microprocessors and chipsets and carries a Zacks Rank #3 (Hold).

AMD will be hit harder, particularly because it caters to the consumer side of the business that has been cannibalized by tablets. AMD is also under-exposed to enterprise, which is seeing upgrades.

Furthermore, the ongoing weakness in the company’s PC business due to higher-than-optimal desktop and AIB inventory levels in the channel remain headwinds. Also, management provided a weak sales guidance for the upcoming quarter. It expects first-quarter 2015 revenues to decrease 15% sequentially, (+/- 3%).  Some of the major factors weighing on guidance are the weakness in console sales and of course the weakness in the consumer PC market.

However, we note that the company has been trying to adapt to the shift toward mobile by creating alternative chips in custom markets where Intel, its giant rival, doesn’t play. Therefore, Advanced Micro’s shift toward more conducive markets, adoption of new products, position in graphics and good execution are expected to pull the company out of the PC market doldrums.

SeagateTechnology PLC (NASDAQ:STX)

Headquartered in Dublin, Ireland, Seagate is one of the largest manufacturers of hard disk drives (HDDs). HDDs are used as the primary medium for storing electronic information in systems ranging from desktop computers and consumer electronics to data centers delivering information over corporate networks and the Internet.

PCs remain the greatest users of HDDs and Seagate derives the bulk of its revenues from these devices. It is the second largest manufacturer of HDDs in the U.S. with a 40% share. Therefore, the cannibalization of PCs by mobile devices will continue to affect Seagate’s results.

The declining 2015 PC numbers indicate protracted weakness in PC HDDs as well, negatively impacting Seagate’s financial position.  

To deal with the situation, Seagate is focusing on the enterprise side, which is a key growth area in the information technology sector. Anticipating a potential acceleration in cloud deployments (due to exponential growth in data storage in the cloud), Seagate is investing heavily to deliver high-capacity storage devices that would support expansion of cloud infrastructure and cloud applications. We believe that this will boost margins and reduce Seagate’s dependence on the PC market.

Currently, the company carries a Zacks Rank #3.

Moving Forward

Are there any features from your laptop that you wish your tablet had? If you had the ability to print from your tablet, how would that increase your productivity? These are some of the frequently asked questions that cross our minds.

But whichever way we think about it, it’s apparent that mobile computing devices and PCs have separate use cases that can’t be totally ignored. This is what will continue to drive enterprise and commercial deployments and it’s also the reason technology players are flocking to these markets. But equally true is the strong demand for mobile devices in emerging economies that will continue to weigh on PC sales growth in the foreseeable future.

Therefore if the forecast provided by research firm IDC is accurate (more or less), there will be a negative impact on these companies as they rely substantially on the sale of PCs.  

To sum up, the current phase of system upgrades and PC refresh cycles remain the near-term drivers for the industry. From a long-term perspective, PCs have to slog it out with other computing devices currently available, as returning to growth still remains a distant possibility.

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