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Black Friday and Cheap Computers

The Science of Hitting

The Science of Hitting

236 followers
This week officially marks the beginning of holiday shopping, with Black Friday kicking the year off (as always) with a bang. Between the discussion of employee walk-outs at Walmart (WMT), opening hours creeping further and further into turkey day, and J.C. Penney (JCP) looking to entice shoppers with the chance to win a slew of prizes, there has been no shortage of discussion about how retailers will navigate Thanksgiving weekend.

Amazon (AMZN) got the party kicked off early (along with other retailers) by offering deals in the days leading up to Thanksgiving; I’ve been on the site looking for some good deals, and have noticed something interesting: whenever any sort of computing device (whether it be a desktop, a laptop, a tablet, etc.) is featured, the product is 100% claimed in a matter of minutes. This is hardly shocking in itself – the opportunity to save 33% when buying even a mid-tier laptop can mean holding on to an extra $150 to $200. However, there’s something else in this action that’s worth discussing (this is where I start rubbing my crystal ball, so take this all with a grain of salt) – as computers have essentially reached the status of “good enough” for the average person (due to the combination of time and Moore’s law), there’s not much justification for dishing out hundreds of dollars more for a laptop with comparable functionality if all you’re planning on doing is surfing the web or playing Minesweeper every once in a while; over time, competition (namely in the form of Asian hardware OEMs) has done a good job of making sure that price points continually fall in order to make this point moot.

However, Microsoft’s (MSFT) Windows 8 might cause this to change for one reason: touch. For anybody who questions the future of touch in computers, I would suggest watching a recent investor presentation with Kirk Skaugen of Intel’s (INTC) PC Client Group; he makes a very compelling argument (backed up with solid consumer testing) suggesting that touch will be ubiquitous with computing in a short period of time (since smartphones and tablets are computing by another name, were already two-thirds of the way there). The problem for MSFT starts when we go back to the original premise: Computing has reached a point where the guts are good enough, and the purchase has become much more price sensitive (obviously not for everyone, but in general). Lower prices are directly in conflict with the industry’s plan (really Microsoft, with a steady dose of support from Intel) to make touch a seminal feature in computers; the result has been driving the prices of mid-tier devices higher (in the case of Dell’s Inspiron One 23 All-In-One Desktop, the price increase for a touch-enabled device is 20%).

At this point in time, this argument seems almost nonsensical; if you don’t want touch, simply don’t buy a PC with that functionality, saving yourself a decent amount of cash. Again, the problem comes back to Microsoft – in their attempt to focus on touch (as I’ve noted previously, it’s a strategy I agree with), Windows 8 has become an operating system with a decidedly different (worse) experience on devices without touch; as newer iterations come into the marketplace over time, my bet would be that Microsoft continues to leverage this feature and focus on it more intently to continue driving demand for their smartphones and “everything else” (tablets, convertibles, ultra books, etc.).

Over time, touch may become a ubiquitous feature for Windows PCs; my fear is that low-end devices will come from another software company focused on value-conscious consumers solely interested in bare-bones computing – and Google (GOOG) has already started along this path with the Chromebook, an offering that could look very different over time and eventually prove to be a competitor for Windows on desktop devices (a description that it loosely fits at this point, at least from my view). The reason why this is concerning is because Microsoft doesn’t care how much the PC costs – their goal is to sell as many copies of their operating system as possible, regardless of if the device costs $400 or $1500; over time, this could pressure the company’s commanding lead in the space, with consumers around the world – many of who are assumed to be more price-sensitive than their developed world counterparts – increasing their impact on the market (and likely benefiting the low cost alternative).

To be clear, this is all speculative and could easily play out much differently; this is simply what I’m thinking based on how I see these different companies approaching the market opportunity at this point in time (I think Chrome books and Bing are both overlooked as long-term threats to Microsoft and Bing, respectively). In the end, Microsoft may be more than happy to make this trade-off: give up some share in the PC segment while likely picking up millions of other users across the smartphone and “everything else” space due to the familiarity with the Win8 OS.

As I noted above, take this with a grain of salt; unlike the snacks industry, it’s anybody’s guess how this will play out over the next decade (I think you can safely bet that Frito-Lay (PEP) will still be dominating that market). If you can take anything useful away from this article, it’s this: As is generally the case, the fact that the future will be filled with unexpected change and breathtaking innovation as new products are developed is fantastic from a consumer point of view; as an investor, it just goes to show that one must tread carefully when jumping into bed with tech companies.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 3.6/5 (14 votes)

Comments

BEL-AIR
BEL-AIR - 1 year ago
Good article, if you think about this is the reason Buffett never invested in tech, to hard to predict the future...

Companies like canon, HPQ, RIM, NOK, DELL, and MSFT etc etc is impossible to predict if they will still be dominant in the next few years or turn things around...

It can go either way at this point, best I guess to just stick with simple businesses.

I like MSFT, but it is a chance to take to invest in them if they can't keep market share or if windows 8 becomes a huge flop.

I guess best to stay out of tech to be sure.
The Science of Hitting
The Science of Hitting premium member - 1 year ago


Bel-Air,

Thanks for the comment; no argument from me on simply staying away from tech companies.
batbeer2
Batbeer2 premium member - 1 year ago
>> Good article, if you think about this is the reason Buffett never invested in tech, to hard to predict the future...


Define tech!

IBM, MMM and BYD => they're about continuous technological innovation (no Buffett stocks?)

- DELL is more akin to Amazon than Intel.

- Nokia has been around for more than a century. Most of that time, they weren't making handsets. In fact, when they were king of the hill, the handsets weren't bleeding edge innovative.

- Canon's largest division in terms of revenue is its multifunction copier division. A model from the nineties will do the job just fine if not for the fact that you can't get some critical replacement parts. Is this business about technology & innovation or service & maintenance?
swnyc2
Swnyc2 - 1 year ago
Excellent comments Batbeer2!

This idea that somehow tech is fundamentally different from other businesses or too hard to understand is flawed.

The general principle of investing is the same. Find undervalued companies that sell products with a moat.

MS Office, Google search, Apple itunes. These products will be difficult to displace.

Not so much different from Coke or Lays potato chips in my mind.

I think current market valuations of many companies in this space (MSFT, CSCO, INTC, MRVL, and even HPQ) are irrational. When the economy improves, people will look back and wonder why the valuations were so cheap.

Regards,

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