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Renee Ann Butler is a freelance finance writer and former management consultant with over 15 years of experience in business management and strategy. She earned an MBA in financial management from Exeter in 2007 and has enjoyed a variety of international business experience, working primarily in... More
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  • The Rise Of Mobile: Dell And Hewlett Packard Struggle To Remain Relevant  0 comments
    Jun 4, 2013 6:22 AM | about stocks: AAPL, AMZN, GOOG, HPQ, HTZ, MSFT, DELL

    Tablet usage is on the rise. In fact, worldwide tablet shipments are expected to outpace total PC shipments by 2015. Mobile computing started as a novelty -- I mean how many people really need to check their email or Facebook constantly -- and grew in momentum with the economy. It is simply cheaper to buy a tablet than a PC. As sales volume of tablets has increased, the average price point has gone down. It is a self-perpetuating cycle.

    There is also a variety of companies looking to use tablets to streamline operations and add value to customers -- from small businesses like Morguen Toole in Meyersdale, PA or Dino's Coffee Company in Olympia, WA, to car rental giant Hertz (NYSE:HTZ), which is looking to install in-car tablets in its rental fleet later this year. Quite literally, tablets are everywhere.

    Background

    Companies like Apple (NASDAQ:AAPL), gained an early foothold in the tablet market. It was an early mover, but the company also did a good job finding the sweet spot with regard to screen size and pricing. Even now, so many years since its debut, Apple's iPad leads in tablet web usage with an 82% market share.

    But what about the other computer manufacturing companies, the ones that don't have the tablet market share like Apple?

    Dell (NASDAQ:DELL) and Hewlett Packard (NYSE:HPQ), two of the top PC makers by shipment, devote a fair share of their businesses to PCs and laptops -- Roughly half of Dell's sales comes from PCs while around 28% of HP's sales are owed to its PC business -- but that market is contracting. The International Data Corp estimates that PC shipments will fall nearly 8% this year, up from a previous forecast of a 1.3% decline -- and even that figure may be generous. In the first quarter 2013 alone, PC shipments sank 14% compared to the same quarter one year earlier.

    Strategy

    Both companies are looking for ways in which to remain relevant in a market that is increasingly more mobile oriented. Dell and Hewlett-Packard have each tried to breach the tablet market, but with different strategies. Hewlett-Packard currently offers two tablets -- one has a 7" screen and runs on Google (NASDAQ:GOOG) Android while one uses Microsoft (NASDAQ:MSFT)'s Windows 8 and has a 10.1" screen. HP's Android tablet is priced less than $200 while its Windows 8 tablet is roughly $700 -- straddling Apple's iPad price point, starting at $499 for an 9.7" iPad and $329 for an 7.9" iPad Mini. Hewlett-Packard is essentially trying to compete on price on its smaller tablet, matching size and price with Amazon (NASDAQ:AMZN)'s Kindle Fire HD tablet.

    Dell also offers three tablets, all of which run Windows 8 and range from $399 to $999 -- two 10" models and the higher-end 18.4" portable desktop. The company is preparing to debut a fourth model by the end of the year -- an 11.6-inch tablet that includes a hinged keyboard. The company is gearing its efforts more towards making laptops that function like tablets. This is hardly the innovation that has pushed Apple to the forefront of the tablet market, but it could be a start in the right direction. After all, just because PC sales are declining, it doesn't mean that consumers won't still need a device that has the power of a "larger" computer.

    Fundamentals

    Dell's PC shipments dropped 11% quarter over quarter, less than the industry average -- but that is hardly a consolation. Looking at the fundamentals in the company's most recent earnings report its sales fell 2%, gross margins dropped 1.4%, and notebook sales slipped 16%. Dell's share price has been rocky thanks to the momentum surrounding the privatization of the company, but analysts are still encouraged. The company is trading at $13.37 on a 52-week range of $8.69 to $14.64 and carries a one-year target estimate of $13.92. That may make for a lower return if consensus estimates are correct, but the company also offers a 2.4% dividend yield, which could make it worth a longer term position. However, Dell's pricing right now is essentially broken. All the buzz surrounding the proposed buyout and possible privatization of the company is skewing the numbers.

    Compare that to HP, the company that launched the low-priced Chromebook in February this year. It recently boosted its EPS guidance over consensus estimates. However, its second fiscal quarter was dismal at best, largely because of a drop in PC sales. The company's profit dropped 32% and revenue fell 10%. That said, cash flow did increase for the company. Either way this is company that is trading at $24.76 on a 52-week range of $11.35 to $25.47, with a one-year target estimate of $22.56. Like Dell, the company also offers a 2.4% dividend yield but in this case that would do little more than make up the difference if the stock falls as much as analysts are predicting.

    Conclusion

    As the PC market shrinks and more people look for ways to have big computing power in a portable format, Dell is introducing products that fill that niche. There are also bound to be those users who prefer keyboards but need an exceptionally portable computer, and Dell is filling that need with its laptop-tablet hybrid devices.

    However, buying into Dell could be a bit late in the game given the current buyout attempt. While I think that the company's upcoming laptop-tablet hybrid could be a huge hit and momentum alone could drive Dell's share price higher, there are less risky investments out there which offer much more potential upside.

    Right now, HP and Dell are both best left as holds.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: quick-picks-lists Stocks: AAPL, AMZN, GOOG, HPQ, HTZ, MSFT, DELL
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