What Do This Week's Earnings Tell Us About the PC Market?

The secular decline of the PC has been a major business and technology story over the last few years. The erosion of the PC market has triggered steep sell-offs in the stocks of some of the world's most iconic tech companies, including Dell DELL and Hewlett-Packard HPQ. Over the last 5 years, DELL has lost more than 34 percent and HPQ is down more than 61 percent. Over the last 52-weeks, DELL has shed almost 22 percent and HPQ has fallen over 40 percent. Overexposure to PCs and other hardware, which has become a low margin, commodity business is the primary reason for the struggles at both Dell and Hewlett-Packard. In recent days, a number of other companies that have exposure to the PC market have released their quarterly earnings results, shedding some light on how their business are performing. Companies of note include Microsoft MSFT, Western Digital WDC, SanDisk SNDK, Advanced Micro Devices AMD, Logitech LOGI, and Intel INTC. While Microsoft has been able to continue to grow its top-line in recent years, margins at the company fell in 2012 along with net income. Microsoft remains very levered to the PC market through its cash cow businesses Windows and Office. The company released its fiscal second-quarter earnings results on January 24. Net income fell 4 percent to $6.38 billion or $0.76 per share, compared to $6.62 billion or $0.78 per share, in the year ago period. This came in slightly ahead of consensus EPS estimates of $0.78. Revenue was up 3 percent to $21.46 billion but missed consensus estimates of $21.53 billion. Overall, the results were not terribly impressive, but the company's PC-centric Windows business grew 24 percent versus the year ago period. Furthermore, Microsoft said that Windows 8 licenses were tracking above the adoption rate for Windows 7. Hard-drive maker Western Digital WDC has had an interesting history. The company's stock trades at a rock bottom multiple despite a terrific history of appreciation. Analysts are estimating that sales at Western Digital will fall almost 25 percent next quarter and 1.30 percent in fiscal 2014. The company reported its second-quarter results on Wednesday. Non-GAAP net income was $513 million or $2.09 per share, compared to $358 million or $1.51 per share last year. Revenue was up to $3.82 billion versus $2 billion in last year's second quarter. This was ahead of analysts consensus revenue estimates of $3.68 billion. Shares of Western Digital are already up around 13 percent in 2013 and the stock continues to be a big-time tech performer. Over the last 3 months, WDC has surged 40 percent. Flash memory and solid-state drive manufacturer SanDisk SNDK has been hurt by falling revenue and margins over the last couple of years. Nevertheless, SNDK is riding a strong uptrend and is already up 14 percent in 2013. The company reported a lower fourth-quarter profit on Wednesday. Adjusted net income was $257 million or $1.05 per share, versus $317 million or $1.29 per share, in last year's corresponding quarter. Nevertheless, the results were way ahead of Street estimates of $0.76. Revenues fell 2 percent for the quarter to $1.54 billion versus $1.58 billion last year. This slightly beat analysts' consensus revenue estimates of $1.53 billion. AMD AMD is another PC-centric company that has struggled mightily in recent years. The stock is down almost 56 percent over the last year. The company's most recent results were better than expected, however, and the stock is up almost 19 percent in 2013. The company reported a loss for the period, citing weak PC demand as consumers are shifting to smartphones and tablets. AMD reported a loss of $473 million or $0.63 per share, from $177 million or $0.24 per share last year. On an adjusted basis, the company lost $0.14 per share versus $0.19 in the year ago period. This beat analysts' consensus of a loss of $0.20. AMD guided for a 9 percent, plus or minus 3 percent decline in sequential revenue. Logitech in another company with significant exposure to PCs. The company sells PC peripherals such as mice, trackballs, keyboards, interactive gaming controllers, multimedia speakers, headsets, webcams and lapdesks. The stock is lower on the year and LOGI missed Wall Street revenue estimates when it reported on Wednesday. The company reported a $1.24 per share loss on a goodwill impairment charge. Adjusted net income was $16 million. Revenue fell 14 percent in the quarter to $614.50 million from $714.60 million last year. This missed analysts' consensus revenue estimates of $667.87 million by a wide margin. Last week, the world's largest chip-maker Intel INTC said that its fourth-quarter profit fell 27 percent due to a sluggish PC market. Intel also missed analysts' revenue expectations. The stock traded down in the wake of the results and Intel has lost almost 21 percent over the last year. Adjusted net income was $2.61 billion or $0.51 per share, versus $3.52 billion or $0.67 per share in last year's fourth-quarter. Revenue fell 3 percent to $13.48 billion from $13.89 billion last year. This missed consensus estimates of $13.53 billion. Recent earnings results from PC-centric companies shows that the environment continues to be weak, although some of the stocks have done well. Going forward, the PC market will continue to be cannibalized by smartphones and tablets, causing many exposed stocks to trade at very low P/E ratios. Companies such as Western Digital and SanDisk show that it is possible to make money in stocks with exposure to PCs, but the decline in the sector has been broadly negative for most companies.