The PC industry is in trouble. The most recent surveys conducted by the International Data Corporation (IDC), show that sales of PCs fell 14% (to just above 76 million units) in Q1 2013. The IDC has been tracking this data for 19 years and the performance in PC sales during the quarter saw the biggest drop at any time during that period. Part of the reason for these declines is the simple reason that PCs themselves are more well-built and lasting longer than ever. But the largest contributor to these trends is the major shift in the consumer toward tablets and smartphone devices.
This shift has now started to manifest itself in the earnings performance of the world's largest PC makers. Dell (DELL) is the latest example, with earnings coming in at 21 cents per share, on a pro-forma basis (eliminating one-time items). This result is far lower than the 35 cents per share that was expected in the analyst consensus estimates. So, while this is a discouraging element to consider when looking at Dell's potential performance in the near term, there are larger reasons to be bearish on the stock on much wider time horizons.
Weaker performances in PC sales have been tied to the lackluster acceptance of new products from Microsoft (MSFT). Specifically, the meager interest in the Windows 8 offering has contributed negatively. Furthermore, wide sections of the market have made the criticism that Windows 8 is a better tool when used with tablets, rather than with PCs.
Broader Shifts in the Consumer
Specifically, reports from Gartner research suggest that sales in tablets will double next year, and come in the neighborhood of 266 million. In this next five years, this number is expected to approach the 500 million unit mark (on an annual basis). These trends are well-known in the industry and this is the reason CEO Michael Dell has started making attempts to take the company private. Dell says this will give the company time to refocus is strategies and position itself in new markets (such as in software and mobile devices), without having to worry about the more immediate needs of shareholders.
But without any major innovations on the horizon, investors should be looking to sell into Dell and its competitors, as they are clearly in a position to lose to more adaptive players in these sectors. Apple (OTC:APPL) is a more clear alternative here. Despite its well-publicized declines so far this year, the company has gone to great lengths to establish itself in markets beyond the traditional PC, and thus is not as vulnerable to the decline forecast for these markets.
In addition to Dell, Hewlett-Packard (HPQ) is setting of for significant declines as well. With a higher P/E ratio than Dell (at 11.5 vs the 9.9 seen in Dell stock), risk to reward ratios for sell positions in HP are even more favorable.
Another option for sector bears to consider is to establish sell positions in the NASDAQ (NASX) as a whole. The argument can be made the the broader index will be supported by companies that have better positioned themselves for these changes in consumer trends. But given the relative size of the companies unprepared for these changes, this dampens the outlook for the broader NASDAQ as well.