Over the past few months, the market seems to have lost its mind when it comes to the PC and tablet business. One day, we're worried about PC sales and Microsoft (MSFT 1.87%); the next day, Apple (AAPL 1.68%) falls on worries about tablet market share. Dell (DELL +0.00%) and Hewlett-Packard (HPQ 2.83%) trip over themselves screwing up their products, and everything hurts Intel (INTC +2.35%).
With all of this fear and all of this worry about all the companies that are losing, I have one simple question: Who is winning?
I've come up with three false assumptions the market is currently operating under as a reason for the drop across the board.
Assumption #1: Apple's incredible run has come to an end.
If you saw Apple's 6.4% drop yesterday and read any of the commentary, you would think the company will soon be relegated to museum status. Technicians are warning about the "Death Cross," according to the Wall Street Journal, and CNBC says it's back in bear territory. There are also a few other items that pushed Apple lower yesterday alone.
- Nokia (NOK 2.34%) signed a deal with China Mobile to sell the Lumia 920T, a Microsoft-powered phone.
- A clearinghouse raised margins on Apple's shares.
- Apple will be back in court with Samsung today, and there's not a lot of hope that Apple's $1.1 billion verdict will hold up in its entirety.
Meanwhile -- back in reality -- just yesterday IDC raised its tablet shipment guidance for 2012 from 117.1 million units to 122.3 million units. It also estimated that Apple would retain a 53.8% market share (down from 56.3% last year). To add to the bullish sentiment, IDC sees 282.7 million tablets shipping in 2016, with Apple holding a 49.7% market share. Market share may fall, but if tablet sales more than double, shouldn't a small drop in market share be OK for Apple?
Elsewhere, Broadcom (NASDAQ: BRCM) saw higher demand in the third quarter and expects more of the same in the fourth quarter due to strong sales of the iPhone 5 and Samsung phones. Wait, more phones? I thought we were in bear territory?
Apple's shares are now trading at 12 time earnings, even before we consider the amount of cash on the balance sheet. I don't think any of the indicators above are saying that Apple will somehow be a terrible long-term investment.
Assumption #2: PC sales are in a downward death spiral.
Microsoft and Intel went into full-on tailspin mode last week when NDP Group said that PC sales fell 21% in the four weeks ended Nov. 17. Pull the fire alarms! Sell everything that has to do with the PC!
Let's take a step back here and consider a few points about the report and the PC market in general.
- NDP's sample period included five days in which Windows 8 was not available -- ironically, about 20% of the sample period.
- Customers aren't accustomed to the Windows 8 platform yet, and there will be an adjustment period before PC sales reach a steady state. Remember that this is the biggest OS overhaul for Microsoft since Windows 95.
- Tablets will continue to take share, and the line between a tablet and a PC continues to blur.
- The PC shelf life is growing longer every year. Ten years ago, a two-year upgrade cycle was normal, now four years may be acceptable to most consumers.
None of this says in any way that PCs are somehow doomed. Form factor will likely change, as we've seen with new products from Dell, Acer, Samsung, and others, but monitors and keyboards are still functional and productive tools in society. One month of poor PC sales at the beginning of a new operating system's life cycle isn't anything worth panicking about.
Assumption #3: Microsoft Windows 8 is a flop.
The way that shares of Microsoft and integral partner Intel are trading you would thing that Windows 8 is dead on arrival. The operating system that is supposed to blur the lines of the smartphone, tablet, and PC is just over a month old, and many commentators are already giving up on big hope for the operating system.
But let's take a step back here. If Microsoft's master plan to create a seamless experience between devices is going to work, it's going to take time. As I mentioned above, customers need to get used to Windows 8, which will make new tablets and smartphones more appealing over the next few years.
This isn't to say that Microsoft hasn't made mistakes. The Surface was priced equal to the iPad, not a great way to steal customers from Apple. There's also concern that smartphone and tablet makers will balk at Microsoft's operating system cost when Google's (GOOG 1.00%) Android system is basically free. These critiques are true, but they're easily fixable. I'm not hearing reviews that Windows 8 or the mobile versions are terrible user experiences. That would be a big deal, but a pricing problem is something even Steve Ballmer could fix.
To put Microsoft's sell-off even further in perspective: If Apple is struggling and losing market share in tablets and Microsoft is struggling with slowing PC sales and an almost non-existent tablet and smartphone market share -- who is winning in these businesses? Is Amazon's (AMZN 2.47%) zero-margin Kindle going to overtake the iPad and become useful for business users like the Surface, or is Google going to take over tablets and PCs in the future? Someone has to be a winner.
Foolish bottom line
If you're like me or any of the millions of people buying smartphones, tablets, and even PCs this holiday season you should see that this sell-off has gotten ridiculous. Microsoft, Apple, Intel, Dell, and HP can't all be destined for failure. Apple has a P/E of just 12, Microsoft trades at 14 time earnings, Intel has a P/E of less than 9, Dell's is 7, and HP is still a mess. One of these companies will be a bargain for investors.
