Is It Time to Short the Computer Makers?

Hardware doesn't matter as much as it used to, and before long could become as irrelevant as most cars.

Think about the average American family. Do you really think Mom or Dad cares which sedan or minivan they own? For the average driver, most cars are interchangeable. Gross margins have declined mightily as a result.

Take Toyota (NYSE: TM). Though margins have recovered somewhat from fiscal 2009 lows, the Japanese automaker used to earn almost 20% on each car it made. Today, gross margins sit at 13.6%. Ford (NYSE: F) is the rare automaker that has higher gross margins today than it did in 2005, but it wouldn't be that way if not for an extraordinary effort to cut costs and remake the company.

And now for the bad news, PC fans
So it is in the computer industry, as well. Dell's (Nasdaq: DELL) gross margin is down to levels not seen since 2007, when Michael Dell returned as CEO. After a brief period of improvement, Hewlett-Packard (NYSE: HPQ) has seen margins return to 2005 levels. Only Apple (Nasdaq: AAPL) has consistently improved gross margin, thanks mostly to innovations such as the iPad and iPhone.

Here's a complete breakdown:

Source: Capital IQ, a division of Standard & Poor's.

If you're an investor in either Dell or Hewlett-Packard, these numbers should scare the heck out of you. Your companies are throwing dollars into hardware design at a time when hardware is no longer what matters -- unless, again, you're Apple.

Nor are you immune, Mac addicts
But even the Mac maker could face this problem someday. I'm already seeing it, and I'm a longtime user of Apple gear.

Consider my 2G iPhone. Months ago I lamented its demise at the hands at iOS 4, the new operating system that shows signs of one day merging with Mac OS into a streamlined system powered by Apple's A4 chips.

At the time, I said I had no plans to immediately ditch my iPhone because I felt it could continue to function well enough. The 2G has exceeded my expectations in every conceivable way. Today, I use the 2G for instant messaging (Meebo), to listen to New York sports radio (ESPN Radio), to record interviews (Voxie), to read comics (comiXology), to watch TV (YouTube), to track primary and secondary research (Evernote), to manage my workload (Toodledo), and to track all my social-media accounts -- in real time (Hootsuite and Boxcar).

Oh, and I make some calls too.

My point? Apple is responsible for almost none of the things that make my iPhone useful. Sure, the Mac maker made the device and the device is great, but it's the software that makes me want to never let it go, often to my wife's chagrin.

Investing in the end of hardware
So let's return to the reason you clicked on this story in the first place. Should you really consider shorting computer makers such as Apple? I'd seriously consider it in the case of both Dell and HP, if only because there's very little software to these businesses.

I'll understand if you think that's too broad a claim. It may very well be. But in computing, users gravitate to products that provide definable value. A box full of circuitry needs software in order to provide value, and neither Dell nor HP offer value in this way. They get their value from third-party providers. Notably, Microsoft (Nasdaq: MSFT) in operating systems, Adobe in design, and Intuit (Nasdaq: INTU) in personal finance.

Apple's computer business doesn't suffer this problem, thanks to Mac OS X and the varying software programs built to make the Mac simple.

Between Dell and HP, I think HP has a better chance of adding value in a manner similar to how Apple does today. The company has operating system experience with HP-UX, long a favored Unix system in large-scale networks, and with Palm's webOS it has technology capable of hosting rich, web-enabled services.

Don't get me wrong; I've not changed my mind that HP overpaid for Palm. All I'm saying is that HP is facing a hardware hole that webOS can help fill. Dell has no such luxury, and may be worth shorting as a result.

This isn't just talk. I've put my thesis into play in Motley Fool CAPS, where I've rated the stock to underperform the broader index over the next three years.

Now it's your turn to weigh in. Would you short any of the computer makers? Are PCs heading the way of the automobile? Does a company like Dell even derive value from its consumer segment; should it ditch PCs and keep moving toward a business-focused services and enterprise hardware company? Please vote in the poll below and then leave a comment to explain your thinking.