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Say Nyet to These 3 Netbook Stocks

By Tim Beyers - Updated Apr 5, 2017 at 8:01PM

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Is the cost of owning this market too big?

Like many of you, we Fools are captivated by netbooks -- cheap PCs that are lighter and less expensive than your average laptop. My friend and fellow Fool Rick Munarriz thinks that Apple (NASDAQ:AAPL) should have one. So does Ezra Gottheil of Technology Business Research. I don't.

The price is wrong
The trouble with netbooks is that they've become so popular that they're gobbling up sales that would otherwise go to higher-margin laptops. Call them the Fine Young Cannibals of the computing world. They're driving manufacturers crazy.

IDC Research says that 11 million netbooks will have been sold this year. Manufacturing executives recently interviewed by BusinessWeek say that between 8% and 20% of those sales might have gone to laptops had netbooks not been available.

Can you imagine? Assuming an average cost difference of $200 between a netbook and low-end laptops, we're talking about between $176 million and $440 million in lost revenue. Not exactly good news given current economic conditions. (You know things are bad when the U.K. is considering a tech bailout.)

More troubling is what this means for the long term. You can't easily raise prices once you've cut them. Just ask Netflix (NASDAQ:NFLX). After years of cutting prices for its DVD delivery service it's being criticized for charging more for Blu-ray discs.

Thus the question: Why would anyone selling a netbook expect to still be able to sell high-margin laptops? "In this economy, people are going to buy on price more than ever," Roger Kay, president of consultant Endpoint Technologies Associates, told BusinessWeek. "[Netbooks are] the classic disruption: A cheaper, less capable competitor comes into the market and takes over."

Hello, Rule Breaker.

Say "nyet" to this netbook, Steve
Wait, it gets worse. In accordance with comments to my article about why Apple shouldn't build a netbook right now, BusinessWeek reports that carriers such as AT&T (NYSE:T) and Verizon Wireless, a joint venture between Verizon (NYSE:VZ) and Vodaphone, could subsidize netbooks, treating them as they might any other smartphone, causing even more cannibalization to the laptop market in the process.

Readers see the logic in Apple avoiding netbooks for now. "Reinvent the "tablet PC", Mac style," wrote Babble100. "Just a flat, thin, light, paper-tablet sized slab with no lid. A bigger version of iPhone with more screen and a snap-on keyboard option. Easy to use. Intuitive. Attractive. Slips into a briefcase with no pain. Synchs with the iPhone but greatly extends its capabilities."

So like Palm's failed Foleo but more functional? I could see that, especially now that Asus may further cramp margins in the netbook category by planning the release of a $200 netbook available next year. The iPhone is already a lot more than a phone thanks to the App Store. For example, combine the Stanza e-book reader with a functional Mac tablet and you've got a serious threat to the otherwise blazing-hot Kindle.

Apple, in other words, has given itself options by remaining a careful observer of the netbook market. As CEO Steve Jobs said in Apple's third-quarter conference call:

You know, one of our entrants into that category, if you will, is the iPhone for browsing the Internet and doing email and all the other things that a netbook lets you do, and being connected via the cellular net wherever you are, an iPhone is a pretty good solution for that, and it fits in your pocket. But we'll wait and see how that nascent category evolves and we've got some pretty interesting ideas if it does evolve.

Cocky? Yeah, probably, but also cagey. Jobs is no dummy; he'll pounce if he sees a chance to tip an emerging market in Apple's favor.

Disruptor, meet the disrupted
Where does that leave the netbook makers and their suppliers? Profiting, for now.

Dell (NASDAQ:DELL) should sell loads of netbooks this holiday season. But with net margins now at just 4%, how much does this company have left to give? Is there any fat left to trim?

Intel (NASDAQ:INTC), meanwhile, is selling the Atom processor for about a third of its full-sized notebook processors, iSuppli reports. How quickly will margins fall if Atom becomes the platform of choice?

Finally, there's Microsoft (NASDAQ:MSFT), which is selling XP for netbooks, but has no assurance of winning the market long term. Ubuntu Linux is already far too popular on the platform.

Netbooks are very likely to be a huge winner this holiday season, and these three companies with them. But King Pyrrhus of Epirus won, too. History has enshrined his fate in a phrase we still use today: a Pyrrhic victory.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$141.66 (2.45%) $3.39
Netflix, Inc. Stock Quote
Netflix, Inc.
$190.85 (5.03%) $9.14
Microsoft Corporation Stock Quote
Microsoft Corporation
$267.70 (3.42%) $8.84
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$50.96 (-2.17%) $-1.13
AT&T Inc. Stock Quote
AT&T Inc.
$20.99 (1.84%) $0.38
Intel Corporation Stock Quote
Intel Corporation
$38.61 (3.21%) $1.20
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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