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More Pain, It Seems

Hardly surprising, but it turns out that both IDC and Gartner have done their homework and found that PC shipments during Q1 absolutely, positively stunk. Four consecutive quarters of dwindling PC sales really does constitute a trend, and it is clear that the PC as we know it - traditional desktop and notebook computers - is on the decline. Part of it is due to a bad macro-economic environment, part of it is due to the fact that most people are more than happy with their old PCs and have no reason to upgrade. Most 4-5 year old PCs are still perfectly fine for what most users do with their computers these days.

People are increasingly moving their daily workloads to devices such as smartphones and tablets, which means that their older PCs are relegated to fewer and fewer tasks, and as a result become less of a priority when it comes to allocating the "new technology" budget in most house-holds. The recent double-digit Y/Y decline in PC sales for Q1 confirms that this trend isn't showing any signs of slowing; it is, if anything, accelerating.

Unfortunately this means that anything dependent on PC sales for survival is going to see a major hit during the 4/11 session, and quite probably for the foreseeable future unless something changes dramatically. Intel (INTC), Microsoft (MSFT), and AMD (AMD) are all in for some more pain today, and I believe that the recent gains in all three of these companies' shares will quickly evaporate. As somebody who has been long these stocks for months, I have seen this many times - optimism on some good news only to be dashed by the harsh reality of the PC market.

In the worst shape possible is AMD. Not only is it bleeding CPU market share to Intel in PCs (which has become much more aggressive in the low end PC market), but it is also losing server market share, and GPU market share to rival Nvidia (NVDA). I expect short sellers to have a field day with this stock as its fundamentals are weak, its balance sheet is spotty, and its competitive position frail. The stock may exit the week back where it started before its monster run - back in the $2.20 - $2.30 range.

The next worst off company is obviously Intel. With >60% of its revenue tied to PCs, weakness here hurts the top and bottom lines significantly. The company is making a valiant push into smartphones and tablets, but those will not move the needle during 1H 2013, and I expect only tablet sales to really make a difference during 2H 2013. The saving grace for Intel is the data-center group. This segment should see double digit growth during 2013 according to management, and the operating margin in this division is sky high (thanks to major IP block development being subsidized by the PC client group as well as much higher ASPs and limited competition). Data center group will help to soften the blow from weak PCs in 2013, but the bad PCs sales are going to keep Intel shares under pressure until the convertible/tablet strategy with "Haswell" and "Bay Trail" plays out during 2H 2013 (and even then, it may not work).

And finally, the best off is Microsoft. While it depends heavily on Windows sales, it has the best balance sheet of the three companies mentioned here, doesn't have the major capex that Intel has to deal with, and pays a solid dividend. Oh, and the company is still on track to grow, even if it is in the low/mid single digits. Google's (GOOG) Android is a problem in the consumer space as it will enable devices that will eat into the traditional Windows PC space, and the poor reception of Windows 8 is likely to drive high end users to Macs while delaying the refresh for low/mid range PC users. Things should get better when PCs have better battery life as well as touch screens by default, but until that happens in 2H 2013, Microsoft shares will also be under pressure.

Can It Get Better?

Things can get better. Intel's upcoming "Bay Trail", AMD's upcoming "Temash", and Microsoft's Windows "Blue" update could make for a powerful 2H 2013. As tablets and PCs converge, the opportunity for "reverse cannibalization" is quite real, and I believe that the Windows 8 ecosystem needs, more than ever, hardware designs that are truly exceptional at price points that offer good value.

Convertible PCs offer a good value proposition, but it remains to be seen if they can be produced at both high quality levels as well as good prices. The current "Clover Trail" based Windows 8 tablets are a joke as they sport low resolution panels (1366x768 against the iPad 4's 2048x1536) and poor graphics processing. "Bay Trail" and "Temash" should help the situation immensely, but it remains to be seen if this is a device quality problem, or if it is simply that onlyApple (AAPL) can ever make money on tablets.

My bet is (very) long Intel, long Microsoft, and long a speculative position in AMD. For the first time in a while, I'm not 100% convinced that my bet is going to pay off as large as I think it will, but my thesis has not (as of yet) been disproven.

Conclusion

There's no two ways about it - PC sales stink, and it's not clear if the companies that have traditionally made a killing in this space will be able to diversify well enough into new growth segments in order to maintain current levels of income, let alone grow. Microsoft is in the best shape of the three, Intel is the next worst off (but it luckily has fabs and data-center), and AMD is the worst off, as it can't compete with Intel in mid to high end PCs, and will feel the heat from the cheaper Android devices in the low end.

Source: Intel, Microsoft, And AMD: It Gets Worse Before It Gets Better