PC shipments continue to decline. Despite an overwhelmingly positive reception for Microsoft's (NASDAQ:MSFT) latest operating system, Windows 10, PC shipments fell 7.7% in the third quarter according to research firm Gartner, and are expected to remain weak until 2017. That weakness could challenge Microsoft and its hardware partners, including Hewlett-Packard (NYSE:HPQ).
No rebound in sight
The rise of ever-powerful smartphones and tablets has certainly taken a toll on PCs in the last few years, and Microsoft's Windows 8 (released in the fall of 2012) was poorly reviewed. But the demand for tablets has slowed in recent quarters, and Windows 10 has garnered a more positive reputation. Still, that wasn't enough to support PC demand.
Shipments of traditional PCs have been in decline for most of the last four years, and that trend continues. In the third quarter of 2011, Gartner reported global PC shipments of 91.8 million units. That figure fell to 73.7 million units in the third quarter of 2015. Gartner cited a strong U.S. dollar as a contributing factor, as the cost of PCs rose in many foreign markets. PC shipments were down by double digits in Europe, the Middle East, Africa, Japan, and Latin America.
Previous Windows cycles have benefited PC shipments, as consumers swapped their old machines for a newer model capable of running Microsoft's latest operating system. The Windows 10 launch cycle, however, has been unique, as Microsoft is currently offering it as a free upgrade to consumers using Windows 7 or Windows 8. Gartner believes that Windows 10 had minimal impact in the third quarter, as those who were eager to get it simply upgraded their existing PCs for free. In the past, Gartner had warned that Windows 10 could actually dampen the demand for PCs. Gartner believes the PC market will return to growth, but not until 2017.
Weak demand could continue to weigh on the PC space
That could be a problem for Microsoft. The Redmond tech giant no longer monetizes Windows in the same way it once did, instead using services and search to drive incremental revenue. But on Microsoft's last earnings call, management was clear in its expectations: Windows 10 is expected to return the Windows platform to growth. If that doesn't happen, Windows revenue could continue to drop as it has in recent quarters, and its ancillary Windows goals could fail. In addition to returning Windows to growth, Microsoft plans to drive more consumers to its subscription Office service, Office 365, and make its search engine, Bing, profitable. Both Office and Bing are platform agnostic, but are more heavily integrated into Windows than rival platforms.
PC OEMs are even more exposed to a dwindling PC market. Hewlett-Packard remained the second-largest PC vendor in the third quarter according to Gartner, but its shipments fell 4% on an annual basis. Next month, Hewlett-Packard will split itself, creating two more focused firms. One of those firms, HP, will be contain Hewlett-Packard's PC and printer businesses. PCs should generate about 60% of its revenue and one-fifth of its earnings before taxes. Given its significant exposure, further PC shipment declines could take a toll on its performance and its stock price going forward.
Gartner's projections could prove conservative if innovative new Windows machines, like Microsoft's own Surface Book laptop, reignite interest in the PC platform. But investors in the space should be aware: The PC market continues to look grim.
Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft and recommends Gartner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.