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Stacy Smith, Intel's (Nasdaq: INTC ) CFO, recently presented at the Citi Global Technology Conference. His key message: "We see an unprecedented demand for computing out there."
Smith said the chipmaker's available market is expanding dramatically, as a fundamental shift is happening right now in which more and more devices are computing and connecting to the Internet. This trend, in turn, drives growth in both the PC and server markets. And we're not talking small potatoes here; Intel estimates that in the next five years, its market will grow from hundreds of millions of units to billions of units.
There's an economic phenomenon that's driving this growth: In multiple emerging markets, the weeks of income on average that it takes a consumer to be able to afford a computer is declining rapidly.
In China, for example, it was 175 weeks of income on average for a person to be able to afford a computer in 1995. But Chinese income levels have been rising, and the cost of technology has been declining. By 2010, it was less than eight weeks of income on average for a Chinese consumer to be able to afford a computer. This is a fundamental shift.
Penetration rates -- the percentage of the population in a market that has a computer -- rise as weeks of income goes down. This is to be expected -- as technology becomes more affordable, more people in a market purchase that technology.
In the U.S., for example, as weeks of income dropped, there was a rapid increase in penetration rates. This same trend was true in Western Europe and Japan. What's notable is that when those markets crossed over the eight-weeks-of-income mark during the mid-'90s, PC sales exploded.
There appears to be a phenomenon that occurs when it takes less than a couple of months of income for consumers to be able to afford a computer, resulting in a rapid increase in PC penetration rates. And this happens across markets virtually everywhere in the world.
What's interesting (and exciting for Intel investors) is that several big markets like China, Latin America, and Eastern Europe are just hitting that eight-week point now. If they follow the historical patterns that we've seen in pretty much every other area of the world, we should start to see rapid increases in penetration rates across these markets. And, in fact, Intel is already seeing this occur.
We haven't seen a phenomenon like this since the '90s, where you have large swaths of the world's population that not only want a computer but can an actually afford one. That's why, looking forward over the next several years, Intel expects two-thirds of the growth in the PC market to come from emerging markets -- to the tune of a couple of billion new PC consumers.
When James Early and I recommended Intel to Income Investor members in April, strong emerging-markets demand was a major part of our investment thesis. The stock has risen about 18% since then, outperforming the S&P 500 by more than 20%. But in addition to Intel, other companies are poised to benefit from this megatrend. They include Microsoft (Nasdaq: MSFT ) -- whose Windows OS still holds the dominant share of the operating-system market for PCs -- as well as PC manufacturers Dell (Nasdaq: DELL ) and Hewlett-Packard (NYSE: HPQ ) . Even Apple (Nasdaq: AAPL ) , with its premium-priced computers, stands to benefit as income levels in emerging markets continue to rise.
The key message: The PC market is not dead. In fact, it appears to be poised for explosive growth in the emerging-markets segment.
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