Four Trends in Dell’s Hardware Business Highlight Importance of Tablets

13.56
Trefis
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DELL
Dell

Dell (NASDAQ:DELL) competes with personal computer manufacturers like HP (NYSE:HPQ), Apple (NASDAQ:AAPL), Acer (TPE:2353) and Toshiba, and increasingly against IBM (NYSE:IBM) and others for IT services. We have a $22.39 Trefis price estimate for Dell’s stock, and we estimate that Dell’s hardware business which includes notebooks & netbooks, tablets, desktops, printers and displays makes up nearly 33% of Dell’s stock. Our price estimate is around 40% ahead of the current market price.

Below we discuss 4 key trends for Dell’s hardware business and their potential impact on Dell’s stock price:

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1) Rising Popularity of Tablet PCs

With the launch of Apple’s iPad in 2010, the demand for tablet PCs has increased at a rapid pace. We believe that this trend will continue as both phone and PC manufacturers like RIM, Motorola Mobility, Samsung, HP and Dell enter into the tablet market in a big way. Dell is planning to launch a number of tablet devices in 2011 targeting both consumers as well as enterprises and there could be tremendous upside potential if the firm manages to capture a decent share in this market.

We estimate Dell will sell around 700,000 tablets in 2011, capturing nearly 5% of android tablets sold in the market, and will increase sales to close to 2.3 million units by 2013. However, a greater market share would mean much higher sales for Dell’s tablets and would result in upside to Dell’s stock (See Dell to Make a Splash in Tablet Market with Enterprise Customers). If Dell could sell around 4 million tablets by 2013, this would add about 4% upside.

2) Desktop Shipments Slow Down

There is an on-going mix shift toward notebooks & netbooks and now tablet PCs, as they become more powerful and affordable. Also the PC business is being increasingly commoditized with very low margins. We discussed this recently in a note titled Why Tablets Are Worth More Than Desktops for Dell. Dell could continue this business if volumes remain high; however, with the desktop market estimated to slow down significantly and as desktops increasingly give up ground to mobile devices, the profitability of Dell’s desktop business could go down.

If our estimates for desktops sold decreased to around 125 million in the coming years, this would clip around 2% off our price estimate.

3) Fate of Displays Tied to Desktops

The upgrade cycle to LCD monitors saw Samsung takeover Dell as the market leader due to its leadership in the stand alone monitor market. Since displays are most commonly sold along with desktops, Dell’s fortunes in the display market rest on the slowing desktop business. To compensate Dell could reduce prices, which would depress margins in an already low margin business.

4) Limited Market Share in Slowing Printer Market

Dell is a very small fish in the printer market with less than 5% market share. Also, overall printer sales have slowed with the emergence of notebooks and wireless networks for printer sharing. This will reduce the number of printers per PC and negatively impact Dell’s printer business going forward.

Given the small contribution of displays and printers, declines in these businesses imply a downside of only 5% in our price estimate for Dell in our bearish scenarios and so are less meaningful drivers.

You can drag the trend lines above to see the impact of different hardware scenarios on Dell’s stock.

See our complete analysis of $22.39 Trefis price estimate for Dell’s stock.