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How a $199 Laptop Could Spell Doom for the PC

Investors are on edge these days, but what else is new. Prior to Microsoft (Nasdaq: MSFT  ) releasing Windows 8, shares in PC makers and in Microsoft were in a holding pattern. Microsoft’s shares rose at around $32, while companies like Dell and Micron had yet to bottom. Only Hewlett-Packard was falling in the summer months, because its problems were known. HP was in a multi-year transition, but the market wanted things fixed faster than that:

When Windows 8 was released, shares in these PC makers did not rise. In fact, more uncertainty drove shares lower. The Surface RT tablet from Microsoft is a departure from the company’s alliance with hardware makers.

One of the greatest threats for investors in the PC sector is the marginalization of hardware. The transition of devices storing information in the cloud is making hardware less important. Sure, it benefits VMWare (NYSE: VMW  ) , Citrix (Nasdaq: CTXS  ) , and (NYSE: CRM  ) , but the immediate threat for the sector is Google (Nasdaq: GOOG  ) .

Google already leads the budget offering of computing with its $249 laptop. More recently, Google is upping the ante. The company is working with Acer and is selling a laptop for just $199. At this price, it is lower than Windows 8-based machines and even less expensive than Apple laptops. The laptop may be sold at such a low price, because it runs an Intel Celeron processor and a 320 GB disk drive.

The low-price of a Google laptop will make it harder to justify Windows Pro Surface devices, which are expected to cost at least $1000. Power-users will point to Adobe Photoshop as a reason to buy a more powerful device, but Google’s $199 laptop will appeal to a wider audience. Need Microsoft Office? Google Docs is available as an alternative.  Photoshop may be replaced with Instagram or a freeware program like GIMP.

PC Companies
HP, Dell, and Microsoft are the usual suspects for PC-investing ideas, but their main attraction right now is low-valuation. According to Kapitall, HP's Price of Profit, or POP, is just 4. Dell has a POP of 6, while Microsoft has a POP of just 9. Investors have clearly discounted any chance of growth in computers. The anticipation is that tablets and smartphones will dominate as consumption devices.

Practical investors should recognize that there is always a market for PCs, especially for content creators (nothing can really replace the mouse and keyboard right now). What the market is stating, though, is that consumption devices will only grow. Google’s low-cost computer will only get lower.

Cloud Computing Companies
Companies with a generally high POP may pull back, but shares will rebound faster than PC makers as markets become more optimistic: (Click here to access free, interactive tools to analyze these ideas.)

1. VMware: Provides virtualization and virtualization-based cloud infrastructure solutions primarily in the United States. Market cap at $36.98B, most recent closing price at $86.45.

2. Provides customer and collaboration relationship management (CRM) services to various businesses and industries worldwide. Market cap at $20.48B, most recent closing price at $147.32.

3. Citrix Systems: Designs, develops, and markets technology solutions that deliver information technology services on-demand worldwide. Market cap at $11.44B, most recent closing price at $61.16.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Kapitall's Chris Lau does not own any of the shares mentioned above.

Read/Post Comments (5) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On November 20, 2012, at 4:09 PM, Solov wrote:

    I can tell you one thing - no $199 laptop will have good enough screen. And if you get good enough screen, you might as well build a decent system, since you're out of penny-pinchers price range.

  • Report this Comment On November 20, 2012, at 8:47 PM, l0tek wrote:

    Whao, Whao... Let's slow down here... I think you have a miss understanding Chris' article.

    Let me explain it like this.

    I am a computer tech, the keyboard is my preferred method of input. But then again, I've been sitting in-front of a computer since my Dad brought one home in the mid 90s. I need to have that keyboard to remote into machine and write commands. I spend all day creating input.

    If your a business professional. Why have an entire machine, it's big and bulky. You have a greater chance of it being separated from your person when you go though airport security. In this Realm the tablet rules. Essentially tablets service one purpose to take information out of a computer.

    A $199 laptop in our world that might as well be free. It's cheap enough for anyone to afford. The consumer isn't going to care if it doesn't have 'a good screen' if the screen breaks it's just going to get thrown out.

    Essentially Google has created a disposable laptop. Use it till it breaks then throw it out and get a new one.

    ~ John K

  • Report this Comment On November 21, 2012, at 3:23 PM, basohn wrote:

    I work in the tech business for the Army (Signal Officer) and I have been building computers since the mid 90's when 56 Kbps was high speed internet 512 RAM was massive and 40 Gigs was a ton of disk space, so basically I am very familiar with and have been participating in this industry for years.

    In the last few years the prices of laptops have dropped like a rock. I paid a little over $1200 (discounted from $1600 with special offers & rebates) for the high-end laptop I am writing this on about four years ago and today I can by a laptop with better specs for about $550.

    Just last night I was shopping for a new laptop for my wife and the average price for a new system with Windows 7 was about $400 with several laptops from the $250 range. To be honest I was shocked at the low prices.

    Even when I was shopping for laptops for the Army this year (and we always pay about 1.5 X higher than the average consumer) the top prices were in the low $800 dollar range where two years ago similar systems were $1200+

    Then you have the gamers (which I am not) and computer geeks (which I am) that will never buy a "name brand" (i.e. HP, Dell, Lenovo, ) desktop system because we like to customize and build our and tailor the system to our needs, so we go to Amazon and Newegg to buy components which continue to lower in price.

    The bottom line is the big name computer manufactures have to reduce their prices to a point where their profit margins are so low it becomes uneconomical to manufacture computers.

    There will continue to be a market for computers and laptops for Government, education, and business, but that market share and profitability will continue to drop as alternate sources and the next generation of innovation comes forward.

    Finally, the cultural change in technology cannot be underestimated. Almost everybody has a smart phone and those upcoming consumers in their teens and twenties are so used to texting on a small screen that the bridge to typing on a tablet is not considered an inconvenience, which furthers the point of the article and pushes the future of big computer manufactures further down the road to oblivion.

    After all when was the last time you used a word processor, typewriter, payphone, or even a fax machine?

    I can take a picture of a check with a tablet and deposit it into my checking account and I can pay a merchant with my credit card on their Smartphone.

    Mobility is the future and cloud based technologies will benefit, but large computer manufacturing companies will in my opinion go the way of the payphone.

  • Report this Comment On November 23, 2012, at 9:46 AM, afamiii wrote:

    What is a PC: A computer running MS Windows? or a form factor screen, keyboard, Mouse and Storage?

    Microsoft Windows is under threat in terms of margins, now that its monopoly is broken, the move to more and more complex (requiring higher power) software OSes is dead. Result as hardware costs continue to drop, OS becomes an unacceptable big part of the price.

    The PC form factor is under market share pressure as more people go for other form factors such as tablets, handhelds and voice control. In the future (or even now) it will be only one of the many form factors that people use to do 'computing' required tasks.

    The PC form factor (whether running MS Windows, Linux, or Lion) will probably continue to exist for a long time to come (though with a lower share) as it has become the work horse for business.

    PC manufacturers are just manufacturers and will build whatever customers want. Perhaps share will shift from Dell, HP, et. al to Samsung, Apple, etc. This is the normal push and pull of competition and changing technology.

  • Report this Comment On November 23, 2012, at 10:12 AM, Costanzawallet wrote:

    I Wouldn't be so fast to discount the importance of hardware to run software even if it is cloud based. Also although many people use google docs or open office etc, there are increasing privacy issues and people are still uncomfortable with storing all their information online.

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