Over the last two years, the PC market hasn't been kind to many of its biggest names, such as Microsoft (MSFT 0.37%), Intel (INTC 0.64%), Hewlett-Packard, and Dell, especially as each of these companies attempts to deal with the disruptive impacts of the mobile revolution.
And in that context, it should come as no surprise that the PC market let investors down once again in the third quarter, contracting 8.6% according to research firm Gartner.
So, what's the investing takeaway here?
For perhaps the two most dominant companies in all of the PC market -- Microsoft and Intel -- their unique challenge is to begin to gain share in the growing areas within the computing market -- the tablet and smartphone space, as the PC market should remain weak for the foreseeable future. And the unfortunate truth that Microsoft and Intel might need to accept is that they'll need to lower prices to gain entry into these growth markets or face losing even more ground to the competition. This put Microsoft and Intel in a very challenging position.
For PC makers like Hewlett-Packard and Dell, the solution is somewhat clearer. Both companies, while still maintaining a presence in the PC market, also hope to expand their presence in the higher-margin enterprise space as well.
In this video, Fool contributor Andrew Tonner breaks down the Gartner numbers, discusses some of the dynamics driving this trend, and gives a few investment takeaways. A transcript of the video's contents is also included below.
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Brendan Byrnes: Hey Fools, I'm Brendan Byrnes and I'm joined today by Andrew Tonner, who is a tech analyst for Fool.com.
Andrew, let's take a look into these Gartner numbers. They come out every quarter. They show what PC sales look like, and for the past six quarters they've been declining. Let's get some more color on this, and maybe some of the companies that are affected.
Andrew Tonner: Yeah. Gartner came out with their Q3 market share numbers and, surprise, surprise, they were terrible. The PC market contracted 8.6%, and it was the sixth straight quarterly decline, as you've mentioned.
I think one of the disappointing things here was, you have a bit of a built-in demand in the third quarter. It's the "Back to School" quarter so there is a bit of a refresh element, where you expect to have people coming back and needing to buy PCs.
Seeing that not come through in the same degree as it has in the past is a red flag for PC investors. You did see a bit of a divergence between brands as well. You saw the top three players, Lenovo, HP, and Dell, actually all grow their shipments and increase their market share.
You saw names like Asus and Acer -- the emerging market names that really dominate there -- actually pull back pretty significantly in terms of shipments and market share.
This continues with the storyline of tablet disruption. The PC market for a while at least, they said, would be a complement -- tablets would be a complement to the space -- and we're just seeing that not be the case.
We're seeing an on-the-margins scenario, where you do have people in emerging markets who are buying PCs for the first time, but now that you have low-cost Android tablets flooding these markets, for uses like consumption and general-purpose computing, now you see a product coming to market that can really match, almost, what you need from a PC.
You see people migrating, in a place where PC growth could be coming, and really it's just shifting to tablets. This is a story, for me, where it definitely damages a long-term buy on cash-cow companies for the PC market, on names like Intel and Microsoft; companies that have these dominant franchises and huge, huge, high margins that need to break into where mobile computing is going.
Really, what we see now is the only way for them to do so is lowering price. That's, of course, going to hurt margins and is why I'm long-term somewhat negatively bullish on these companies.
You look at them as really challenging. We've seen Microsoft almost at least talking about eliminating the licensing fee for some HTC phones, and it just is emblematic. These companies are really struggling to make money and adjust to the mobile future.
Byrnes: Yeah, they say, "Follow the trend in technology," so this is definitely one that investors should be taking a look at. Thanks, Andrew.
