(AAPL) Personal Computer Market Losing Luster

Uncertainty continues to loom over the PC market. The rise of next generation ultra-portable gadgets (mainly tablets) has taken the market by storm, diverting consumer spending dollars from traditional desktops and notebooks.

The success of Apple Inc.’s (AAPL) iPad has convinced the world that a thin rectangle portable touch screen with long battery life is enough to take care of most of our daily computing needs. While there was initial opinion that tablets were market expansive and there could be some truth to this, researches are now forecasting that iPad unit sales will grow at an average annual rate of more than 50% from this year to 2015. The fact that tablets are much cheaper is obviously playing a role as well.

During the second quarter of 2011, PC shipments in the U.S., Western Europe, U.K., France and Germany reduced 5.6%, 18.9%, 15.0%, 17.8%, 13.3%, respectively on a year-over-year basis, due to weak consumer demand.

The picture for the PC market has become clearer, with the research firm Gartner Inc.’s (IT) recently lowered forecast. For fiscal 2011, Gartner’s growth estimate went from 9.3% to 3.8%, based on the sluggish economic growth in Western Europe and the United States (an offshoot to the debt crisis), and the growing demand for media tablets, mainly iPad.

The macro concerns in the two largest and most mature markets had a severe impact on corporate and government IT spending, which also influenced Gartner’s forecast. The research firm currently expects the PC market to grow 10.9% in 2012, down from the original projection of 12.8% growth.

Vital Statistics

The PC market in developed markets is mature. Moreover, the commoditization of PCs has resulted in price wars. The players can only adjust product prices in an effort to maintain their respective market shares. The advent of lower-cost alternatives is not making things any better. In this backdrop, most of the growth in traditional PCs is in fact coming from emerging markets, where pricing is an important consideration deciding the purchase.

As a result, a number of Asian companies, such as Acer, Lenovo and Samsung, with significantly lower-cost manufacturing capabilities have started making headway. The many pressures on pricing have made PCs an essentially low-margin business.

The softening of demand due to the greater-than-expected popularity of tablets and the Japan crisis has also resulted in some channel inventory. Accordingly, information technology (IT) distributors such as Ingram Micro Inc. (IM), Arrow Electronics Inc. (ARW) and Tech Data Corp. (TECD) are all seeing inventories piling up.

During the second quarter of 2011, customers placed orders ahead of demand in order to minimize potential disruptions related to the earthquake in Japan. The sector is currently looking to cut the level in the upcoming quarters.

A decline in demand from other factors could lead to a more aggressive reduction in inventory, posing additional risk to the component companies. This could in turn result in protracted weakness in the industry, until the excess is burnt off. The silver lining is the 2011 holiday season, which could help the process if orders are cut significantly..

How the Industry Stalwarts Are Reacting

Hewlett-Packard Co. (HPQ) has maintained its leadership position in worldwide PC shipments for many years. But margins in the Personal Systems Group have lagged other areas of its business. The segment generated single-digit margin expansion in the last few quarters, less than any of the other segments.

Additionally, H-P is also steadily losing share to its Asian competitors, which are flooding the market with a variety of lower-cost devices. All these have forced H-P to opt for a segment spin off.

H-P is not the first to take this route. In 2005, IBM Inc. (IBM) offloaded its PC unit to China’s Lenovo Group Ltd.

If H-P’s PC business sell-out plan works out, it will create a bigger opportunity for not only another tech giant Dell Inc. (DELL), but also for Asian manufacturers ASUSTeK Computer Inc. and Acer Inc. Five years ago, Dell lost the title of the world’s top personal computer maker to its longtime rival H-P. Though Dell now holds the second position in worldwide PC shipments, it too is suffering from soft consumer demand. But Dell is well positioned in the enterprise vertical, which could cushion it to an extent.

Currently, HP has a Zacks #5 Rank, which translates into a short-term Strong Sell recommendation indicating estimate cuts by the analysts. Dell has a Zacks #2 Rank, which translates into a short-term Buy recommendation. Apple has a Zacks #1 Rank, which translates into a short-term Strong Buy recommendation. IBM has a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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