Research firm IDC reported a 13.9% decline in PC shipments globally in Q1 CY13, which was the steepest decline ever.  Hewlett-Packard (NYSE:HPQ), the largest PC manufacturer in the world, suffered the most with a 24% drop in the number of units shipped. While we are concerned that this decline will affect HP’s top-line going forward, we expect measures such as incorporating Leap’s 3D gesture technology into its PCs will help arrest its bleeding market share.
Factors Affecting PC shipments
PC shipments have been on the decline during the last four quarters. According to IDC, PC shipments increased 4.26% in Q1 2012 but have plummeted since then and recorded the steepest decline in Q1 CY13 when shipments fell by 13.9% to 77 million units. Gartner also reported a 11.2% decline in PC shipments in Q1 CY13. Smart mobile devices, mainly constituting smartphones (46.1% y-o-y growth in 2012) and tablets (78% y-o-y growth in 2012), are the primary reason for the decline in PC shipments over the past year.  Some of the other factors that affected PC shipments are:
- A slowdown in PC demand across the world: While PC sales are down in developed markets over the past few quarters, they witnessed a double digit decline in the Asia Pacific region excluding Japan (APeJ) for the first time in Q1 CY13 as shipments declined by 12.7% y-o-y.  While users’ preference for smart mobile devices (SMDs) over non-mobile PCs is one of the reasons for the decline, persistent softness in demand and ongoing budget pressures continued to weigh on PCs shipped in Q1.
- Windows 8 failed to enthuse users: Windows 8 was launched in October last year and the industry expected the launch would augur well for PC sales. However, the new OS did not live up to expectations and its sales declined after the initial success (nearly 60 million licenses were sold in the first four months after the launch).  Windows 8 confused the user with multi-functional touch capability that did not add any value over the existing Windows 7. Many buyers, therefore, deferred from buying new Windows 8 PCs and instead chose to use existing Windows 7 based PCs.
- Evolving technology favors mobile devices: SMDs are expected to drive 57% of total IT growth in the coming years.  Companies are focusing on building their cloud software and platforms as devices of the future will run web-based cloud apps instead of native apps. Therefore, we expect more users will likely adopt thin clients or tablets that require minimal storage and processing power. This change in technology is one of the biggest contributor to the decline in PC sales.
PC And Workstations Division Is Reeling From Declining Shipments
HP’s PC and Workstation division is the fourth largest division, which contributes 29% to its revenue and makes up 14% of its estimated value. According to IDC, HP posted a substantial 23% double-digit decline in shipments in Q1 CY13. We expect the decline in the global PC market to continue and HP’s market share to decline further. HP’s market share in PCs declined from 17.7% in Q1CY12 to 15.7% in Q1CY13. We have factored in this decline in our price estimate and expect the market share will continue to shrink to 11.3% by the end our forecast period.
However, the decline will not affect our valuation for HP substantially as the company derives 71% of its value from other divisions such as services, printers, and server & storage. Even if HP’s PC market share were to fall at a faster rate, the bottom-line would not be impacted significantly.
HP To Incorporate Leap Motion’s Technology To Boost Sales
In an effort to counter the increasing popularity of SMDs, which offer touch compatibility and eliminate the need for physical peripherals like keyboard, HP has announced its tie-up with Leap Motion 3D. HP believes that Leap Motion’s gesture technology will improve the user’s PC experience and will aid in contactless interaction with digital content.
HP is currently bundling Leap’s dongle with some of its products and later plans to sell HP devices embedded with Leap Motion’s technology. If HP can market this technology on its PCs successfully, it might lead to a slower decline in HP’s market share. Moreover, as this will be a value-added feature to HP’s existing product-line, HP might be able to sell its PCs for a higher price. This may translate into better EBITDA margins.
We currently estimate the company’s EBITDA margin to decline from 8.2% in 2012 to 7% by the end of our forecast period. If this move is successful and many early adopters for this technology emerge, HP’s margins will stabilize at 2012 EBITDA levels. In this case, we see a 5% increase in our price estimate.
We currently have $18 price estimate for HP, which is approximately 15% below the current market price.
- PC Shipments Post the Steepest Decline Ever in a Single Quarter, April 10 2013, www.idc.com [↩] [↩]
- Mobility Reigns as the Smart Connected Device Market Rises 29.1% in 2012 Driven By Tablet and Smartphone Growth, February 21 2013, www.idc.com [↩]
- Microsoft: 60 million Windows 8 licenses sold to date, January 8 2013, www.zednet.com [↩]
- IDC Prediction’s 2013 : Competing on the 3rd Platform, February 21 2013, www.idc.com [↩]