Microsoft (NASDAQ:MSFT) recently announced its fiscal year Q3 2011 earnings in which it noted that the business PC market grew by 9% compared to the same period last year. On the other hand, the consumer PC market declined by 8%, dragging the overall PC market down by 1-3%. [1] PC market growth is not only important to Microsoft, but also to PC manufacturers like Apple (NASDAQ:AAPL), HP (NYSE:HPQ) and Dell (NASDAQ:DELL).
In our earlier note titled PC Market Weakness is Bad News for Microsoft, we discussed how long-term weakness in the PC market could spur downside to our $29.62 price estimate for Microsoft stock. Our price estimate stands about 15% above market price.
Business PC Refresh Cycle Continues
The PC refresh cycle is driving the business PC market, and Microsoft expects that this cycle could continue through its fiscal 2012. The recent decline in the consumer PC market was primarily due to a 40% drop in netbooks sales. [1] The PC market is a critical driver for Microsoft, and we expect notebook and netbooks growth to be in double-digits for the next few years, although the desktop market is unlikely to see much upside going forward.
Regarding PC market growth, management commented:
“The business PC refresh cycle continues and is still in the early stages. Second, emerging markets continue to play a larger role in total PC shipment volume and now represent nearly half of all worldwide PC shipments. [1]
On the struggling consumer PC market, management cited “increased competition for consumer spending and the strength of Windows 7 consumer PCs in the prior year”. [1]
Implications for Microsoft
The strength of the business PC market should support Microsoft’s profitability in the short-term. But once the PC refresh cycle ends, the business PC market could stagnate, meaning that the impact of the consumer PC market will become amplified.
See our complete analysis for Microsoft stock here
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