How to Profit From Struggling PC Sales

Market researchers IDC and Gartner just cut their PC growth forecasts. IDC went first, reducing its 2011 unit growth forecast from 7.1% to 4.2%. Gartner followed with a more optimistic view, shrinking its outlook from 10.5% to 9.3%. The revenue-growth outlook is likely to be lower, given typical PC price declines.

It's easy to identify the losers from slowing PC growth. That would include Hewlett-Packard (NYSE: HPQ), the world's largest PC vendor, and No. 2 Dell. Identifying the winners is tougher.

That's because there's a debate raging about the reasons behind slowing PC growth. Some blame Apple's (Nasdaq: AAPL) iPad tablet. Others say PC growth is fine but has shifted to emerging markets, where unbranded "white box" makers account for a larger portion of sales -- and sales of these white boxes are often unaccounted for and otherwise difficult to track. Still others blame cloud computing, which is driving processing work and storage off PCs and mobile devices and into data centers -- the "cloud."

Probably it's all three.

Tablet landscape
When it comes to tablets, there's no doubt Apple's iPad is a raging success. What's less clear is whether there will be any other real winners. Dell's efforts in the tablet market have not resulted in any successes so far. HP plans to launch a promising but unproven proprietary tablet on July 1.

Emerging-market landscape
Emerging-market growth is one reason Intel (Nasdaq: INTC) believes it's faring better than Dell and HP. Intel management has suggested that market researchers such as IDC and Gartner aren't getting a full count of PC shipments in emerging markets. If that's the case, Intel competitor Advanced Micro Devices (NYSE: AMD) could also benefit. In price-sensitive emerging markets, AMD has the advantage of being the less costly alternative.

Dell was late to emerging markets but now has traction. HP stumbled with notebooks in China last year, when it had a customer-service snafu that cut its market share in half in just one quarter, but it's now recovering. Apple's high prices limit its appeal in emerging markets, yet it's still rolling out popular products such as the iPhone and iPad in emerging markets (so there is plenty of upside opportunity), its sales are growing much more rapidly in international markets than in the United States, and its Mac computers are taking market share from PCs.   

Cloud landscape
Apple is playing the cloud from a different angle from Dell and HP. Its MobileMe service will give way to iCloud later this year. Although MobileMe got off to a rough start and the jury is still out on iCloud, Apple is never a company to underestimate. Dell and HP are currently benefiting from cloud growth through server sales, and both should get some growth from recent cloud-service pushes, but I see nothing to indicate that their also-ran status in services will be any different in the cloud.  

Other ideas
There are other ways to play tablets, emerging markets, and the cloud while avoiding PC exposure. For example, mobile-processor player ARM Holdings (Nasdaq: ARMH) is a clear beneficiary of tablets. And with Microsoft announcing that its next Windows version will run on ARM, the company will be able to enter PCs as a growth market, as it will be taking share from traditional PC processor makers AMD and Intel. Unfortunately, that shows in its priced-for-perfection valuation.

IBM sold its PC business to Lenovo in 2005, which strengthened its position in emerging markets at the same time it put PCs in its past. Smart! IBM's early traction in emerging markets has paid off. In addition, its No. 2 position in servers -- with a 29% share -- and its No. 1 position in IT services are benefiting from cloud growth. 

Storage providers EMC (NYSE: EMC) and NetApp are cloud beneficiaries with no PC drags. VMware's (NYSE: VMW) virtualization software helps make servers, storage, and PCs more efficient. The cloud only adds to its promising outlook. But similar to ARM Holdings, you can see it in the company's valuation.

Cheat sheet
Got all that? Heck, I had to make a table to keep track.

Source: The Motley Fool.

Foolish takeaway
Even as PC growth slows, the tech sector offers attractive opportunities for investors of all types. For value investors, IBM is a safe, solid winner. Intel is a riskier bet, which is reflected in the stock's P/E ratio of 10. For growth-at-a-reasonable-price (GARP) investors, Apple is the obvious choice. For growth investors willing to pay for perfection, ARM Holdings and VMware are on a roll. Turnaround players might want to take a look at Dell.

What do you think: Will slowing PC growth do in Dell, HP, or Intel? To help you monitor your investments, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now:

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