After years of relentless growth, the global PC market has stagnated. The rise of mobile devices -- tablets, in particular -- has pressured sales of traditional PCs. With an increasing number of people shunning desktops and laptops altogether in favor of mobile devices, a return to robust growth in the PC market doesn't seem likely.
The PC, however, is not going away. A laptop will always be more versatile than a tablet, and desktops will remain the ultimate productivity machines. PC sales may not be growing much anymore, but there's still opportunity in this market for investors. Lenovo (NASDAQOTH:LNVGY), Microsoft (NASDAQ:MSFT), and Intel (NASDAQ:INTC) are all poised to benefit from trends currently playing out in the PC market.
The market leader
Lenovo bought IBM's PC business back in 2004, and during the next decade, the company slowly rose through the ranks of the top global PC vendors. Lenovo surpassed Hewlett-Packard last year to become the largest PC vendor in the world, capturing 19.4% of the global PC market during the fourth quarter of 2014.
Despite its leading market share, Lenovo still has room to grow its PC business. Since 2002, the percentage of PCs sold by the top five PC vendors has been growing, and this trend doesn't appear to be changing.
In 2002, 60.9% of PCs were sold by vendors outside of the top five. In the fourth quarter of 2014, this percentage stood at just 33.4%. Two-thirds of the PC market is now in the hands of the five largest companies.
As companies with the advantage of scale continue to push smaller competitors out of the market, Lenovo has the opportunity to grow its market share without needing to take sales away from other top-five vendors. The amount of market share up for grabs is nearly as large as Lenovo's and HP's market shares combined, creating a huge opportunity for all of the major PC vendors going forward, regardless of whether the PC market grows as a whole.
Forced to innovate
One would think that the stagnation of the PC market would be terrible news for Microsoft, given that the company derives a big chunk of its revenue and profit from the Windows operating system. With mobile devices running Android and iOS selling in huge numbers, Microsoft's OS is no longer the only game in town.
But the rise of mobile devices has forced Microsoft to innovate. Recognizing that it needed to put Windows on every type of device under the sun, not just traditional PCs, the company designed Windows 8 to work on both PCs and touch-based devices. Windows 8 certainly isn't perfect, and it has a major perception problem; but the next version of Microsoft's OS, Windows 10, will be the culmination of all of Microsoft's efforts to bring Windows into the mobile era.
Windows 10 will run on a wide range of devices, from smart phones to PCs, and developers will be able to create one universal app to run on them all. Instead of the PC being in its own world, separate from mobile devices, Windows 10 will create a unifying experience that will ultimately strengthen the PC market and Microsoft Windows. The stagnation of the PC market may be the best thing that's ever happened to Microsoft, although it will certainly take time for all of this to play out.
New form factors, with Intel inside
Intel is another company that is heavily dependent on PCs, but the company has continued to grow its PC chip business by winning market share away from its only competitor, Advanced Micro Devices. There's only so much market share to win, though, so this obviously can't continue forever.
Intel has been aggressive about getting its chips, especially its low-power Atom chips, into tablets and two-in-one devices, as well as low-end laptops. The line between PCs and tablets is getting fuzzy, and I would argue that anything running Windows that's not a phone should be considered a PC. In this sense, the number of different PC form factors has grown, now including tablets and a wide variety of different two-in-one devices in addition to laptops and desktops.
Intel is really the only company that has products that can span the full range of PC-like devices. At the low-end, there's the company's new Atom processors, the x3, x5, and x7. From cheap 7" tablets all the way to Microsoft's Surface 3, Intel's Atom provides enough performance for these small form factors.
Intel's Core M offers more power, and it can be found in higher-end two-in-ones and laptops, including Apple's new MacBook. Lastly, the powerful Core processors provide the kind of performance needed for machines made for productivity, like high-end laptops and desktops.
While the traditional PC market is stagnant, the expansion of form factors, especially at the low-end, creates a meaningful opportunity for Intel. AMD is the only other company that can make chips that run Windows and support legacy desktop applications; but its products are largely uncompetitive at this point, especially in low-power devices. Intel is truly in a league of its own.