What's Really Happening to the PC Industry?

By Sasha Cekerevac for Investment Contrarians

As I have talked about many times before, investing in companies that can grow corporate profits over the long term is essential when it comes to becoming a successful investor. Sometimes, though, it does pay to be a contrarian and go against the herd.

One sector that has been hit hard lately is technology stocks. Technology stocks, especially those that build hardware for personal computers (PCs), have seen corporate profits erode substantially over the past decade.

After a shift by consumers toward tablets and smartphones, the technology stocks that have not been able to adapt to these new product forms have seen a gradual but significant drop in corporate profits. The question to ask: is a turnaround possible?

The latest data indicate that technology stocks in the PC sector will face significant headwinds. For the first quarter of 2013, global PC shipments declined 13.9% compared to the same quarter in 2012, according to research firm International Data Corporation (IDC). (Source: “PC Shipments Post the Steepest Decline Ever in a Single Quarter, According to IDC,” International Data Corporation web site, April 10, 2013, last accessed April 19, 2013.)

This is the worst drop year-over-year for PCs since IDC began tracking the market in 1994. This is also not an aberration, since the market has now witnessed four consecutive quarters of declines.

However, since technology stocks in the PC sector have sold off dramatically, is it possible that these stocks now offer a value trade? The recent takeover attempt on Dell Inc. DELL might shed light on this question.

There have been several interested parties looking to take Dell private. However, recent news that The Blackstone Group L.P. BX has decided not to participate in any takeover of Dell is certainly worrisome. (Source: Terlep, S., et al., “Blackstone Ends Pursuit of Dell,” Wall Street Journal, April 18, 2013.)

As I’ve previously written in these pages, Blackstone is an extremely well-run company with highly intelligent analysts and managers. If the company doesn’t see any value at such low levels for Dell, this could weaken any argument for other technology stocks in the PC sector.

We all know that corporate profits continue to erode for PC-related technology stocks; now with Blackstone pulling out of this deal, I would be cautious in thinking that these firms offer any long-term value.

One of the old-school technology stocks in the PC segment that is trying to make a change is Hewlett-Packard Company HPQ. The company just had a substantial shake-up of its Board of Directors, and the firm itself is trying to move away from traditional PCs and into services and servers.

Hewlett-Packard (HP) is essentially trying to move into the domain of International Business Machines Corporation IBM. However, both the server and the service sectors are highly competitive, and I don’t see the potential for HP to grow corporate profits at a fast pace over the next few years.

Unfortunately, I believe technology stocks that are either primarily PC-based or are moving into a highly competitive market such as servers will find it difficult to grow corporate profits.

Differentiation is crucial for generating corporate profits. If a market becomes commoditized, then the lowest-cost producer can gain market share; however, this will be at a lower margin level, meaning the produce will need higher overall revenue to generate any corporate profits.

At this moment, I would avoid hardware makers when considering technology stocks. We are getting to the point that most hardware is so similar that a company cannot justify charging consumers a larger premium in pricing. This makes generating corporate profits that much more difficult.

Over the long term, the one company that continues to gain market share when considering technology stocks is on the software side, and that is Google Inc. GOOG. The stock has been quite strong, so I would wait for a pullback; but I think that over the next decade, Google will be hard to beat and will continue to drive corporate profits in comparison to other technology stocks.

This Article What’s Really Happening to the PC Industry? was originally published at Investment Contrarians