New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Value Ideas and Strategies
Share and discuss value investing ideas and investing strategies.
New Topic Search
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicSearchLog In
DELL, HP and Microsoft’s Position in The Dying PC Industry and What They are Worth
Posted by: Jae Jun (IP Logged)
Date: November 14, 2013 07:17AM

For almost 30 years, PCs dominated the computing industry. But in the last 2 years the decline in sales is obvious.

IDC Worldwide quarterly PC Tracker projected a 7.8% decline in worldwide PC shipments. However, the actual outcome was worse with more than 15% declines in shipment volume in the second quarter of 2013.

Last quarter, PC shipments fell 8.6%.

Going forward, the growth rate for notebook and netbook sales is expected to be around 4-5%. This may sound ok, but consider that just a a few years ago, growth rate was around 24%.

This isn’t surprising considering how the growth of mobile devices in just a few years have gained momentum.

The computing industry has shown a massive shift towards smartphones and tablets in just a few years.

Mobile Traffic Surging

Based on Monetate Q1 2013 E Commerce Quarterly report, the traffic to ecommerce websites via mobile devices doubled in the year.

PC vs Mobile Usage for Ecommerce Sites | [www.smartinsights.com]

Breakdown of Each Device Type | [www.smartinsights.com]

So what does this tell you about the development in the PC industry?

Are tablets and other mobile devices the future of computing?

The Rise of the Tablet and Portable Mobile Internet Device

Tablets were meant to be a media consumption device but it has broken all convention and is now being used now as a productivity device.

Though not as powerful as desktops, mobile devices are developing in rapid speed to keep up with the needs of users. An example of how mobile devices are adapting to extreme changes is the massive development of apps. To date iOS and Google Playstore have more than 1 million apps respectively and growing day by day.

New mobile developments continue to come out and now we are so used to doing things on our devices like mobile banking, purchasing online, sending money to family, accepting credit cards, project management, booking reservations and so on.

Expect to see more mobile devices eating up the PC market share.

DELL (DELL) Left the Party Early

The introduction of the iPad in 2010 caught everybody off-guard.

Especially PC makers.

People made fun of the name and predicted that it was just a fad that would die out.

iPad Evolution

Super Absorbent

Who knew that a single device would shake the entire computing industry.

Michael Dell took Dell private in order to revive the business around its enterprise solutions, away from the pressures of Wall Street.

Quote:
[we] need to restructure to cope with the computing landscape away from the pressures of quarterly reports from Wall Street and focus as IBM does on providing its storage servers and services to public organizations and large companies.

By the time the deal for DELL closed, it was trading at a cash adjusted PE of 4.5, P/B of 2, with a ROE of 12% falling from the high 30% range.

Michael Dell may have bought the company at a cheap price, but it does prove that the PC industry is not what it used to be.

DELL Intrinsic Value Should Have Been Above $20

As a case study, here is a previous stock valuation article on Dell.

HP (HPQ) Showing Strength With its Business Solution

In the past year, HP’s market share has been increasing. The stock price has been rewarded with a 85% boost YTD.

HP Leading Market Share | [www.macrumors.com]

The good thing is that HP positioned itself strategically as a business device that’s why it still sees stability despite the decrease in PC sales.

But legendary short seller Jim Chanos is publicly short HP citing that its core business is declining.

Last year, he shared a presentation on HP where he also labeled it a value trap citing 5 key points.

  1. Cyclical and/or overly dependent on one product
  2. Hindsight driving expectations
  3. Marquis management and/or famous investor(s)
  4. Appears cheap using management’s metric
  5. Accounting issues
So what has HP done right then? Here’s a quick look at the change in HP strategy leading to success so far.

  • Move HP into higher value, higher margin growth categories
  • Sharpen HP’s focus on its strategic priorities of cloud, solutions and software with an emphasis on enterprise, commercial and government markets
  • Increase investment in innovation to drive differentiation
The strategy doesn’t include much talk about it’s legacy PC business. At least HP knows that the industry has changed and the market is rewarding it for this new direction.

From a numbers point of view, it isn’t a bad short. But at the same time, if you believe that the focus on the death of PC’s is overblown, it a pretty good value play too.

Source: OSV Stock Analyzer

If HP’s enterprise focused strategy continues to play out, the intrinsic value should look like this.

HP’s Intrinsic Value Above $30

Above the $30 level.

Download the Stock Report on HP

Microsoft’s Strategy in the PC Space

Let’s look at this whole topic from another angle.

By thinking about the expected growth of Microsoft’s business, it can give you insight into the PC industry.

Microsoft isn’t a fully integrated hardware manufacturer but PC sales certainly matters a lot to the business. You can’t sell software unless the hardware is available.

Look at the way revenue is divided (thanks to Trefis). Microsoft Office is the number one revenue generator. Microsoft is making money from licensing so the more computers to install Office, the better.



Trefis has a price target of $42 on the stock price vs the current $38.16.

If I run a simple reverse DCF by using the TTM FCF of $23.5b and 9% discount rate, the current growth rate baked into the price is 2%.

Even though MSFT is a cash cow and pumps out FCF each quarter, it has been inconsistent over the past 5 years.

MSFT Inconsistent FCF

Previously it was easy to assume a growth rate of 10%, but as more money is spent on capex to gain traction for cloud based business, I expect it to grow between 4-8%.

This equates to an intrinsic value range of $42 to $51.

(To learn about how these stock valuations were performed, here’s a free ebook that goes over multiple valuation methods.)

Download the Stock Report on MSFT

Thoughts on the PC Industry

It is true that the PC industry is slowing down.

Dell went private to hide from public scrutiny, HP is focusing on new strategies and Microsoft OS sales are slowing down.

Growth in the industry is in the single digits compared to 20+% growth a few years back.

But will it die like the cassette tape?

Doubt it.

In value investing, a lot of emphasis is placed on bottoms up investing, but at the same time, value investing also involves understanding the industry.

With the way the industry has been trending, does this mean that the companies mentioned have a high chance of becoming value traps?

What I do know is that the PC industry and players in this space have become a whole lot more difficult analyze since the tablet explosion.




Guru Discussed: Michael Dell: Current Portfolio, Stock Picks
Stocks Discussed: DELL, MSFT, AAPL, HPQ,
Rate this post:

Rating: 0.0/5 (0 votes)



Re DELL HP and Microsoft s Position in The Dying PC Industry and What They are Worth
Posted by: TonyPow (IP Logged)
Date: November 14, 2013 10:33AM

Great analysis.

All my investment software require Explorer and it is very hard to use my data a small tablet. I still believe the PCs still have an eternal life but the market will be invaded by tablets.



Guru Discussed: Michael Dell: Current Portfolio, Stock Picks
Stocks Discussed: DELL, MSFT, AAPL, HPQ,
Rate this post:

Rating: 0.0/5 (0 votes)





Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide