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.
Could tablets be worth more to Dell than its traditional desktop business? Yes, even despite the fact that Dell is currently the second largest desktop vendor in the world. Higher growth expected in tablet unit sales coupled with significantly higher margin on tablet devices make this business much more valuable to the company.
We previously discussed Dell’s foray into tablets (Tablets to Help Push Dell Stock Above $20) and how the company is in prime position to capture a decent share of the enterprise tablet market, which could soon become as big as the consumer tablet market (Dell to Make a Splash in Tablet Market with Enterprise Customers).
We maintain a roughly $22 price estimate for Dell’s stock, with tablets contributing a little over 5% of this value and desktops adding only 4%. Our price estimate currently implies a 45% premium to market price.
Tablets Expected to Exceed Desktop Sales
According to a Forrester analyst, tablets will surpass desktop sales by as early as 2013 if the current surge in demand continues. This surge was initially sparked by the launch of Apple’s iPad in 2010. With a number of companies emphasizing new tablet launches, tablets could make up as much as 21% of the global PC market by 2013, up from 6% in 2010.
Desktops, on the other hand, could see their share drop from 32% in 2010 to 20% in 2013, according to Forrester research. 
Higher Margins Make Tablets More Profitable than Desktops
The EBITDA profit margin for Dell’s desktops declined from around 7% in 2005 to nearly 4% in 2010 as the manufacturer cut down on prices in order to remain competitive. Tablets, on the other hand, had a significantly higher EBITDA margin of around 17% in 2010.
Although we do forecast a decline in tablet margins in the future, tablets should remain much more profitable than desktops. We estimate both tablet and desktop prices will decrease going forward due to increasing commoditization, but the decline for desktops will be accelerated by slowing demand and cannibalization from competing devices like notebooks and tablets. On the other hand, the decline in tablet pricing will be mainly a result of pricing pressure from other tablet vendors, and should not be as sever as that of desktop PCs.
Drag the trend lines in the interactive charts above to see the affect of various sales and profit margin scenarios on Dell’s stock value.Notes: