Wednesday, December 17, 2014 4:13:09 PM
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The PC’s Not Dead, Says Citi, Raising Estimates
By Tiernan Ray
Citigroup’s Jim Suva today offers an upbeat, contrarian view of the personal computer market, writing that unit shipment growth may return in the next few years, rather than expectations for a decline.
After an onslaught on of tablets, everyone jumped on the “PC is dead” theme, writes Suva: “With PC units declining by a record 10% in 2013, investors and industry analysts were quick to dismiss the PC as dead, many predicting the market to perpetually decline by double digits as we enter the ‘post-PC era’.”
“Not so fast,” writes Suva: the PC is never going to return to double-digit growth, but he sees it being just flat this year, rising 1% in 2016, and then 2% in 2017, versus consensus expectations for a 2% decline the next two years.
Basically, some of the reasons for decline, such as Apple‘s (AAPL) iPad, are moderating. At the same time, the modest rebound in sales that was attributed to companies buying machines before Microsoft‘s (MSFT) Windows XP went out of support, was not the whole story, so people have underestimated the staying power of the PC longer-term, he thinks.
Enterprises are generally returning to buying PCs after a hiatus, he writes:
Fast forward a year, the pessimism has certainly moderated as PCs are set to decline by only 2-3% in 2014. That said, this market is still by and large viewed as a secular decliner with most estimates looking for market contraction for the next 2-3 years (IDC at 1-2% decline through 2017). At this point, the key reason why investors are still skeptical on any growth in PCs near-term is the notion that 2014 demand was artificially buoyed by a rush to replace PCs running Windows XP—which Microsoft officially ended support in April, and with no such catalysts in 2015, the market will continue to decline or maybe worsen given difficult comps. Although we admit that this will be a modest headwind for growth in 2015, the potential impact will likely be much smaller than investors believe. Although we fully acknowledge that the PC market is beyond the period of growing 8-12%, our analysis indicates that this market has the potential to grow low-single digits, at least for the next 2-3 years [...] Corporate PCs in emerging markets (EM) will start to grow again given an aging installed base and steady employment growth; cannibalization from tablets has diminished significantly; and the headwind following the recent demand uplift from Windows XP expiration will be modest. We detail our analysis in the following section.
In particular, emerging markets went on a spending spree before 2011. Combined with slowing macroeconomic trends, that binge last decade led to extended lifetimes in which companies in emerging markets held onto PCs:
Our analysis indicates that the annual 7% decline in commercial PCs in EM (27% of total PCs) since 2011 can be entirely blamed on the aging of the PC installed base. We estimate that the PC replacement cycle stretched almost 1.5 years during that period to currently above 4.5 years. To put this into context, this is worse than the 1 year increase we witnessed in the US — which happened during the depth of the recent recession (2Q08-1Q09). We believe this aging of the EM corporate PC installed base can be attributed to two factors: 1) following a spending spree on PCs during much of the last decade, we believe the average age of a EM corporate PC had contracted to 3.3 years by 2011, well below the normal 3.8. In other words, there were more new PCs in the workforce than necessary; and 2) a deteriorating macro and IT spending.
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