Analyst Jim Kelleher of Argus Research recently named Dell Inc. and Hewlett-Packard Co. as “value names” among providers of computing for large companies.
Value names, indeed. I periodically use Standard & Poor’s Capital IQ to run a screen looking for the cheapest companies in the S&P 500 in terms of their price to earnings and other factors. Just over a dozen names – the cheapest 3 per cent or so of the index – typically make the cut.
Both Dell and HP have been on that list for much of the summer and fall. And they’ll stay there indefinitely after HP cut its profit forecast Wednesday. The news dragged both companies down to multiyear lows (2003 for HP, 1997 for Dell).
The issue is that the two companies are yoked to the declining fortunes of the personal computer. The pain that HP and Dell are suffering in their PC operations threatens to obliterate any progress the two make in transforming their business models for a new era.
Now, to be clear, this is not a cutting-edge theory, particularly with the digerati. The explosion of smartphones and tablets in the last few years has increased talk of the “post-PC era.”
While I’m writing this column on a desktop computer, and you may be reading it on one, there has been a recent tipping point. Research firm IHS iSuppli reported last month that less than half of the ubiquitous “DRAM” chips produced in 2012’s second quarter were placed in personal computers.
“The fall is notable, given that the share of PCs hasn’t dipped below 50 per cent since the 1980s, when personal computers were a new product whose sales were rising at rapid clip,” IHS analyst Clifford Leimbach wrote.
While Mr. Leimbach said this “doesn’t mean that people will stop using personal computers, or even necessarily that the PC market will stop expanding … PCs are no longer generating the kind of growth and overwhelming market size that can single-handedly drive demand, pricing and technology trends in some of the major technology businesses.”
The IHS report got sporadic attention in the mainstream press, but as one can imagine, was all over news sites for the tech crowd. In a story headlined “It’s Official: The Era of the Personal Computer Is Over,” AllThingsD(igital) writer Arik Hesseldahl said it took the PC industry about two decades to sell its first billion units. About 350 million PCs shipped last year.
Smartphones have surged past PCs in terms of sales volume. About 655 million smartphones will be sold worldwide this year, nearly twice the number of desktop computers. And then there are tablets: Apple sold 55 million iPads in the last four quarters, which, Mr. Hesseldahl notes, is only 5 million fewer than HP’s 2011 PC sales.
“Some people have sought to ‘go paperless’ in their day-to-day lives by relying on tablets and smartphones for the things they used to print to paper,” he wrote. “I wonder now if there may soon be a trend of going ‘PC-less.’ It’s not gone yet, but it is going.”
Which brings us back to HP and Dell, which have been moving past their PC core by making expensive and only partially effective forays into consulting services and “enterprise” servers designed for corporate use.
In its most recent quarter, Dell was pleased to announce sales gains in enterprise solutions and services, storage, et cetera, with CFO Brian Gladden saying it “provided another proof-point that our long-term strategy is right.” Alas, the businesses aren’t large enough to have kept Dell from posting an overall sales decline of 8 per cent and a 21 per cent drop in operating income.
HP’s numbers were worse, because its enterprise segment shrank and only its small software segment posted sales gains. Its total revenue fell 5 per cent year-over-year. In the guidance given Wednesday, CEO Meg Whitman says HP hopes, by 2016, to post revenue gains that match the low bar of GDP growth.
Value names, indeed. They may be worth a flier if you believe the post-PC era is exaggerated or that HP and Dell’s leadership can turn these battleships around.
But it looks increasingly like the gains they make in their new businesses will be sharply muted, if not wiped out, by declines in their PC business. That suggests a long, hard road of declining profits and falling share prices. It’s a post-HP, post-Dell era for investors.
|HPQ-N Hewlett-Packard Co.||27.70||
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