3 Companies Going Down With the PC Ship?

What do Logitech (Nasdaq: LOGI  ) , Western Digital (NYSE: WDC  ) , and Dolby Labs (NYSE: DLB  ) have in common? They're passengers on the desktop/laptop PC cruise ship, and they can see the tablet iceberg on the bow.

OK, so maybe that seems a little dramatic. Tablet sales are projected to make up 20% of the PC market this year, but they aren't practical replacements for laptop and desktop personal computers used for computation, word processing, graphic design, video production, and digital photo manipulation. But all three companies' revenues are tied to PC sales, and the likelihood of a 20% impact in the first year of widespread availability suggests more later.

Taking on water
Logitech manufactures add-on components for desktop and laptop PCs. Their most popular products are keyboards, mice, speakers, and webcams. While relatively few new computers come with Logitech hardware, the brand is a popular choice for add-on and replacement input devices. While deciphering the exact extent of Logitech's PC exposure is difficult, it's the vast majority of their sales.

Western Digital builds hard drives. PC hard drives account for at least 66% of revenue. Tablets use flash memory for storage, rather than disk, in the process sacrificing speed for battery life.

Dolby licenses its digital audio technology to PC manufacturers. The Dolby name is synonymous with high-quality audio and digital audio decoding. 29% of Dolby's revenue is PC licensing. Tablets to date do not include more advanced Dolby technology that collects higher licensing revenues, nor is there a compelling reason to incorporate it -- as with MP3 players, stereo earbuds are standard for audio output.

Manning the lifeboats
Companies that can move quickly to include tablet-friendly products may fare better. Logitech, for example, has recently signed an agreement with ZAGG (Nasdaq: ZAGG  ) to manufacture and distribute the ZAGGmate tablet case with keyboard. That is an excellent fit with its existing product line, although it will take several quarters to see how it impacts revenue. Rather than tackle the tablet issue head-on, Dolby appears to be spending its research budget on 3-D sound for theaters and flat-panel TVs, which may be promising as a replacement source for licensing revenue. Western Digital just bought Hitachi's hard drive unit and seems to be locked in a death struggle with Seagate (Nasdaq: STX  ) for high-volume, low-margin market share in a market that may be shrinking.

All hands on deck
Logitech may be the winner in this group -- it is actively adapting its products to the tablet market. But there are obviously other companies whose fortunes are tied to either PC or tablet sales. Let's talk about them in the comments section below.

To stay updated on any of the companies mentioned above as they navigate a future with challenged PC sales, add them to the Fool's new My Watchlist feature to receive up to date news:

Fool contributor G. David Frye owns or has exclusive use of six personal computers for work (software development) and play (Motley Fool research). He'd love to own a Xoom as long as someone else is paying for it. He owns shares of Dolby.

Motley Fool newsletter services have recommended Dolby Laboratories and Logitech International. The Motley Fool owns shares of Western Digital and Logitech International. Motley Fool newsletter services have recommended Write Covered Call in Logitech International SA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 19, 2011, at 7:13 PM, khaledmrd wrote:

    PC is Growing in Emerging Markets like China, also Logitech going big time after Tablets, Today announced waves of tablets for Ipad and Android 3+ accessories for May in US and June in Europe, said more will be announced in next months

    Logitech's Lifesize systems for Skype & also certified to link with Microsoft's Lync realtime communications architecture.

    Next generation of Google TV as it Get Android 3.1 (Honeycomb), Plus Android Market this Summer

  • Report this Comment On May 19, 2011, at 7:19 PM, khaledmrd wrote:

    i will add Keep tuned for Logitech Potential in new spaces with Google Android@Home: Google Home Control, Chromebooks, Google Movie, Google Music, Tablets HD Video calling.

    2nd Logitech Era start 2011 will be bigger than 1st PC Era started in 1980s

    2nd Era = Tablets + Smartphones + PC + Notebooks + Smart TV + Digital Home + Digital Security + Video Communication + Internet Media Streaming + Cloud networking

    i think Logitech will be far bigger, check out their site and new Category Tablets (US and UK sites) as different products listed

  • Report this Comment On May 20, 2011, at 9:35 AM, woo131 wrote:

    Increase in tablet sales does not equate to decrease in laptop sales. The two are not equivalent, especially for business use, in addition to the uses you describe at the beginning of the article. Many business systems are obsolete at this time and will need replacing soon.

  • Report this Comment On May 20, 2011, at 11:01 AM, gdf55 wrote:

    @woo131: I would keep an eye on Gartner's PC sales reports and forecasts. Here's a recent one: http://www.gartner.com/it/page.jsp?id=1632414. I think the best explanation I've heard is that, while PC sales will continue to increase in the long term, the short term isn't going to be pretty with a lot of interest in tablets and smartphones.

  • Report this Comment On May 20, 2011, at 4:08 PM, doshknight wrote:

    So, why is Dolby on the Active stocks on Motley Fool Stock Advisor? Not on hold or sell. If we know, at this point, that it's on its way out.

  • Report this Comment On May 20, 2011, at 10:59 PM, gdf55 wrote:

    @doshknight:

    I didn't say that Dolby's on the way out, only that their licensing model may be shifting over time. Because licensing is the bulk of Dolby's revenues, Mr. Market is concerned.

    Dolby scored big by essentially becoming the standard for DVD digital audio. Dolby technology is licensed into every DVD player and HDTV. They pulled off another big win with a licensing deal for Windows 7 - previous versions of Windows did not come with it by default. Now sales of all three product types (DVD, HDTV, and PC) are depressed.

    Dolby's other main revenue sources - digital cinema projectors and digitization services - are relatively small contributors to income. Projection, in particular, is an area where there's intense competition and Dolby has lagged other companies in second-generation digital ("4K") projection systems. I can't tell yet how the 3D experiment will play out. It seems to me that the cinema and service segments serve mainly to keep the Dolby name in front of everyone; the real income comes from consumer device licenses.

    As for the Stock Advisor recommendation, that's a topic for their boards. I'm not a big Dolby fan any more for all the reasons I state above. But I also have learned that the SA team focuses a lot more on cash flow and increasing revenue. Dolby is still a huge cash generator with its technology licensing (very low COGS); the effects I have described are going to take a while to work their way through to the cash flow statement.

    That's my not-so-humble opinion!

  • Report this Comment On May 22, 2011, at 5:28 PM, MegaEurope wrote:

    "Western Digital just bought Hitachi's hard drive unit and seems to be locked in a death struggle with Seagate (Nasdaq: STX ) for high-volume, low-margin market share in a market that may be shrinking."

    If the PC and hard drive markets don't shrink over the next year, will you admit you are wrong? Somehow I doubt it.

    Keep in mind that unreasonably low expectations have been key to WDC's excellent returns over the last 10 years (+650%). You are not the first to claim that HDDs will soon be dead.

  • Report this Comment On May 23, 2011, at 11:04 PM, gdf55 wrote:

    @MegaEurope: I really think you're simplifying things too much - or oversimplifying what I'm trying to say. You're putting the "HDDs will be dead" words in my mouth. I didn't say it.

    The OEM PC parts market is all about volume; the margins are pretty small. Hard drives are more or less a commodity; WDC does as well as it does by being ruthlessly proficient in its manufacturing processes. They will certainly not be selling fewer hard drives. The real question is the rate of growth.

    The stock prices of most (I would say all) of these companies are tied not to revenue but to revenue GROWTH. Slower growth will mean smaller P/E's and lower stock prices. My investing cash can be put to better use where the growth is more of a sure thing.

  • Report this Comment On May 26, 2011, at 11:32 PM, stgodby wrote:

    "You're putting the "HDDs will be dead" words in my mouth. I didn't say it."

    The title of your article is "3 Companies Going Down With the PC Ship?" Isn't your whole point that the PC industry is dying along with the parts and periferals which support them? As dramatic as it is, going down with a ship implies death. I have to agree with woo131 in that more tablet sales doesn't mean less pc sales. It's a big boat. and there's plenty of room to keep everyone afloat for quite some time. And these are innovative companies that have the ability to adapt. Certainly pc storage, server storage, etc. will continue to be in demand as demand for ever larger files for video and music continue to drive that market.

    While tablet sales may canabalize some of the PC market initially, I expect the long term demand for PCs to remain fairly robust. Companies can't do without them and college students won't be writing their final reports on a tablet any time soon. Smart phones and tablets will only complement the existing PC demand.

  • Report this Comment On May 28, 2011, at 7:37 PM, MegaEurope wrote:

    David Frye,

    What do you think "death struggle" and "a market that may be shrinking" mean? Silly me, I interpreted them to mean that you thought the HD market was dying.

    Death struggle certainly doesn't seem a good description of an industry in which every manufacturer has put up record earnings over the past 2 years. Are Coca Cola and Pepsi locked in a death struggle? How about Nike and Adidas?

    The bigger picture is that financial writers have no accountability. I'm sure I could find thousands of false predictions published by TMF, with only a few dozen subsequently admitted to.

  • Report this Comment On May 28, 2011, at 7:53 PM, MegaEurope wrote:

    Regarding your other point, I'm well aware that earnings and cash flow (and their rate of growth) are more important than revenue.

    However the consolidation in the HD industry will relieve some of the margin pressure.

    If you look closely, WDC has been less vulnerable to margin pressure than other manufacturers. They have the best management, the best balance sheet and a dominant market share.

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