Why PCs Aren't Even Close To Being
Dead
By Michael Murphy
Editor, Technology Investing
December 6, 1999
Wall Street and the media have been saying for months that the
PC industry is dead. But anyone truly tapped into the
technology industry knows that they're absolutely wrong?and
that their mistake could cost uninformed investors who listen to
them thousands upon thousands of dollars in tech stock profits.
It would be easy to make fun of Wall Street, which trashed a
certain well known PC maker when growth "slowed sharply"
from 50% a year to 38% a year. I'd think a company selling
more than $2 billion worth of computers every month would be
rewarded for growing 38% a year, but maybe that's just me.
The PC was the first very high technology product that wound
up on the average person's desk. Starting from zero, the PC
industry will be almost a $200 billion industry in 1999. Yet Wall
Street still hasn't figured out that this is a very seasonal business,
which helps explain why they're so off target with regard to the
industry's future.
It also would be easy to make fun of the media. They are so
confused about the difference between year-over-year growth
and sequential growth, not to mention the impact of declining
PC prices, that most of them think the PC business is shrinking.
The truth is, 442 million PCs will be installed by the end of
1999?and it seems clear to insiders like myself that the PC
revolution won't be over until at least 2.5 billion PCs are
installed all over the world! The PC market grew 33% in 1999
and will continue to grow 20% a year for at least the next 5
years. Why?
A consumer boom caused by cheap Internet-ready PCs, the
reemergence of the Asian market, an explosion in e-commerce
for small and medium size businesses, and innovative new
products like the iMac, Windows 2000, and voice-recognition software are just a few of the
factors that will drive strong PC sales for many years to come--whether Wall Street realizes it
or not. PCs dead? They aren't even tired.
Four companies now account for 40% of the worldwide market and are holding or gaining
share. Compaq (NYSE: CPQ) maintained its #1 position in the first half of 1999 with a 14%
share of the worldwide market, the same as in 1998. Dell (NASDAQ: DELL) has improved
its #2 position from an 8.5% market share last year to 10% in the first half of this year. IBM
(NYSE: IBM), the third-largest PC company, also improved their market share, in this case to
9% this year from 7.5% last year. Their portable ThinkPads and European businesses are
very strong.
The fourth-largest PC company is Hewlett-Packard (NYSE: HWP), which held their market
share at 6%. Throw in Acer in Taiwan, Legend in China, and perhaps Packard Bell and
Gateway (NYSE: GTW), and you have the cast of characters that will supply the vast bulk of
those 2.5 billion PCs I told you about earlier. Very few companies have the international reach
to come into this market at this late date. Brand loyalty builds repeat customers. Case in point:
although Apple has a small market share, it has the #1 position for brand loyalty.
How You Can Profit From Wall Street's Mistake
The big driver of PC sales in 2000 will be the small business and SOHO--small office/home
office--markets. Small-business use of the Internet more than doubled from 27% in 1996 to
61.5% in 1998 and will approach 90% by the end of 2000. There are 4.3 million small
businesses on the Internet today; that number is growing at 23.5% per year. The number of
businesses with a Web page is growing 103% a year, and the number with e-commerce
capabilities is growing 138% a year, but is only up to 20% of the total.
The Internet is the killer application. It's not just email, chat, search engines, or e-commerce. It
is the whole experience as an application to be used to cut costs, as a channel to receive and
deliver communications and as an information source. It's driving a worldwide explosion in PC
sales that, in turn, drives an intense demand for servers and larger computers to connect all the
PCs to the Net and serve up Web pages.
Smart investors who understand the real PC story will earn tremendous returns in the months
ahead. I've just unveiled to my clients my #1 pick in the PC business--a company perfectly
positioned to profit thanks to its recent move into the high-growth sub-$1,000 market and its
superior direct-to-consumer model. I think this stock will make us at least 50% profits in the
next 12 months?and I'd love to tell you all about it. |
