IDC data reported in the Wall Street Journal disclosing a 14% decline of PC sales saw an immediate negative reaction in the share prices of Microsoft (MSFT) and Intel (INTC). The IDC report excluded sales of tablet devices. Had those devices been included, the decline in Windows based unit sales would have been somewhat less.
IDC separately publishes forecasts for the tablet computer market. These forecasts are more favorable for Microsoft Windows tablets than the market seems to realize.
IDC forecasts tablet sales of 190 million units in 2013, growing to 350 million units in 2017, a compound growth rate of just under 17%. Within that forecast, Windows tablets are forecast to grow at a blistering 49% rate and Window RT units at 28%, far outpacing Android and iOS growth rates of roughly 15% apiece.
Tablet Operating Systems, Forecast Market Share and CAGR 2012-2017
Source: IDC Worldwide Quarterly Tablet Tracker, March 2013
The IDC data suggest that Windows 8 and Windows RT tablets will capture 2.8% and 1.9% market shares in 2013. This implies sales of 5 million Window 8 units in addition to more than 3 million Windows RT devices if their 190 million unit estimate for the total market holds true. Assuming Microsoft Surface Pro makes up 3 million of the 5 million Windows 8 tablets and Surface RT comprises the bulk of Windows RT units, then Microsoft tablet sales in 2013 will add approximately $4 billion to Microsoft's revenues and $1.2 to $1.6 billion to Microsoft's operating income (assuming Surface RT and Surface Pro margins in the 30% to 40% range).
By 2017, the IDC data suggest annual sales of Windows tablets approaching 26 million units, with another 9 or 10 million Windows RT tablets sold that year. If Microsoft can hold onto 60% of each category, Microsoft tablet revenues will reach more than $15 billion in 2017 and contribute $4.5 to $6.0 billion to income. Microsoft will also earn licensing fees on the Windows 8 and Windows RT tablets sold by other vendors, adding another several hundred million to revenues.
I believe the IDC data understate the attraction of Windows 8 tablets and overstate the growth of iOS and Android in the tablet space. iOS and Android had the space more or less to themselves until October 2012 when Surface RT was released. Surface Pro and hybrids from Dell (DELL), HP (HPQ), Lenovo, Acer, Asus, Samsung, Toshiba, Sony (SNE) and Fujitsu did not enter the market on any scale until well into Q1 2013. We have only anecdotal evidence of their sales, but I am beginning to see them in use at my son's university and in coffee shops around my home.
I believe IDC underestimates the demand for Windows 8 devices all the way from desktops to phones. Touchscreen all-in-one desktops are emerging that are truly exciting machines combining the traditional desktop with the ability to view content, run applications normally reserved for mobile devices, and work from a big screen using keyboard and mouse as well as touch. By using Skydrive or Dropbox, users can access the same files they are working on their desktop from their ultrabook, tablet, hybrid or smartphone while on the road.
At the same time, they have unprecedented ability to share, collaborate, publish and seek comments from others with universal access to social media like Facebook, LinkedIn or Twitter, or content providers like Netflix (NFLX) and Amazon (AMZN). You no longer have to choose one platform for some functions and a different one for others. A common user interface augments the cloud storage to make the experience smoothly transition from one device to another.
Regardless of whose forecast you believe, it is clear that Windows based tablets are going to make inroads into the market and create a new category of growth for Microsoft. A $4 billion dollar business growing at high double digit rates has value. In Microsoft's case, the value is not only the income from the device but also the pull through of Office 365, Outlook and other Microsoft software and accessories.
I am long Microsoft. You should not ignore it.
Additional disclosure: I hold calls on both MSFT and INTC, am short puts on MSFT and have a smaller short position in MSFT as a hedge.