Is Microsoft Corporation's Surface Poised to Explode?

Tech investors have likely heard this story before: The global PC market has been taking one step forward and two steps back for the last several years, and it doesn't appear that's going to change anytime soon. Even the pending introduction of Microsoft's (MSFT -1.28%) new Windows 10 OS -- historically a precursor of a PC sales pop -- isn't expected to stem the tide. For Q1, Gartner reported a 5.2% drop in worldwide PC sales.

But not all is lost in the broader PC market. Gartner recently released a report projecting sales for a segment of the mobile PC market it refers to as "ultramobile tablets" and "hybrid ultramobiles." The former are described as "two-in-one tablets," and the latter -- hybrid ultramobiles -- are defined as "two-in-one detachable and convertible ultramobiles." If Gartner's predictions prove correct, Microsoft's Surface Pro 3 and new-ish Surface 3, billed as able to replace a laptop, could be poised to shine.

How big is big?
Gartner's dour desktop PC sales report for Q1 was tempered somewhat by a jump in mobile PCs in general, and hybrid mobile devices in particular, and the first quarter was just the tip of the iceberg. Though still a relatively small portion of the overall PC market, hybrid sales are on pace to reach 21.5 million units this year, according to Gartner, a whopping 70% jump compared to 2014. The analysts estimate hybrid devices will account for 12% of total sales of mobile PCs in 2015 and rise to 26% in 2019.

Assuming the estimates pan out, the huge sales improvement would make the hybrid mobile market the fastest-growing PC segment, and Microsoft's Windows 10 could help maintain that torrid pace. No, Windows 10 isn't expected to pump up desktop PC sales, but the new OS could push many enterprise customers over the edge in deciding to finally replace their old Windows 7 OS and legacy systems.

According to Gartner, as businesses start to migrate to Windows 10, the barriers to hybrid ultramobiles will dissipate, and "offer a better user experience with touch and voice as well as universal Windows apps -- apps written just once that receive device-specific user experience tweaks to allow them to run on different Windows devices." 

As for consumers, 21,000 were surveyed across five countries and a full 11% of current tablet users, and 10% of desktop owners are considering a switch to a hybrid form factor in the next couple of years, said Gartner. How do Microsoft and its Surface tablets fit into all that projected growth? Very nicely.

Already making inroads
Naturally, fast-growing markets breed a lot of competition, but even with that Microsoft is poised to excel. In keeping with CEO Microsoft Satya Nadella's mobile theme, Windows OS is running a lot more than just Surface Pro 3 and Surface 3 mobile PC devices. Windows is the OS of choice for several ultramobile PC alternatives from companies including industry leaders like Lenovo (LNVGY 0.75%)) and Taiwan-based Asus.

As it stands, Asus is head-and-shoulders above the rest with a 41% market share in hybrid ultramobile devices last year, having moved 3.1 million units. Lenovo was second, selling 1.9 million hybrid ultramobile devices, with Hewlett-Packard a distant third, with 800,000 hybrids sold. Where's Microsoft? Gartner splits hairs in defining Microsoft's Surface units because its keyboard is sold separately, so it's defined as an "ultramobile tablet." In that market, Microsoft tops the list thanks to its 36% share.

When Gartner relaxes its rather narrow definition of a hybrid ultramobile device -- something Surface Pro 3 and Surface 3 clearly are, based on screen size, their light weight, and end-to-end computing capabilities -- Microsoft owns an astounding 14% of the fast-growing market, placing it third overall behind Asus and Lenovo.

With just a year, give or take, of Surface Pro 3 availability, and only months for the lower cost Surface 3, Microsoft seems to be hitting its hybrid stride at just the right time. Nadella's recent management team shuffle, which included letting hardware leader Stephen Elop go and folding Windows and Devices into one division, was a clear sign that Microsoft's mobile ambitions extend beyond device sales. But that doesn't mean Nadella is done with hardware, particularly a solution like Surface that's already making waves in the PC market's fastest-growing sector.