Published July 19, 2013
Are you reading this on a tablet, your phone or a computer? Chances are it’s one of the first two, as the age of the personal computer is fading fast. PCs changed the game once, and now it’s time for investors to position for another shift – an era when having “Intel inside” your data device and portfolio is not necessarily enough.
Intel (INTC) itself is ringing the bell loudest after confessing in its latest earnings report that its PC chip sales sank 7.5% year over year. Since the company has a commanding share of this category – estimates going as high as 88% of all Apple and Windows desktops and laptops – it’s a pretty good sign that the market has shifted beneath the giant’s feet.
At this point, the question is past whether the PC sector can turn things around and more about which stocks are going to be the leaders in the post-PC world. Although I wouldn’t recommend buying these potential giants right now, this shift is important enough that it’s worth evaluating their current roles and future potential in a post-PC world.
Fighting for a Piece of the Pie
According to the latest numbers from Gartner, 2.35 billion consumer data devices will ship this year. A whopping 75% will be phones, and maybe half of the phones will be smartphones running on the Android, Apple, Windows or Blackberry operating system.
That means maybe one in six will be traditional PCs, and most of the remainder – one in twelve – will be tablets or “ultra-mobile” devices that combine tablet portability with something more like a laptop’s processing power.
Those numbers foreshadow a PC sales decline of 15%, or almost 52 million units between 2012 and 2014. With phone sales already heading toward $2 billion a year and consumers waiting a little longer between upgrades, the global market is starting to look saturated with unit sales, maybe increasing 8% over the three-year period.
Tablets, the new tech craze, have the most space to grow off a relatively low base and with the best momentum prospects. Gartner’s analysts see tablet sales more than doubling between 2012 and 2014, at which point these devices will equal PCs in the numbers being shipped.
Intel finds itself in unfamiliar territory, having to fight entrenched competitors for a piece of these markets, which management largely ignored for decades in order to focus on maintaining its dominance in chips and the then-essential desktop environment. A breakdown from Strategy Analytics assigns the company a 6% share of tablets and a dismal 1% of smartphone processor sales.
However, I’m not counting out Intel just yet. The company has a chance to do what it takes to become a bigger factor in either or both of these markets. Rolling out its own operating system in partnership with Samsung should help make the case that its processors are relevant in mobile computing, provided of course that the system can win users away from iOS and Android in the first place when it finally hits the market.
The Tablet is Booming, but Phones? Not so Much
Meanwhile, there are already plenty of leaders to evaluate. In smartphones, Qualcomm (QCOM) is the unsung powerhouse, with an estimated 49% of all new devices sold in the space powered by its processors. I recommended this company for a time in my GameChangers service, and we sold it for a 62% profit in less than a year.
Right now, the stock is looking a little frothy at 17X trailing earnings, but Wall Street is basking in growth near 24% this year and 10% in 2014. Today’s valuations may not adequately reflect anticipated expansion of the overall phone market.
If you’re searching for the INTC of the new century, QCOM is certainly a candidate, especially when you get chances to enter or add to a position on weakness. Recently the stock has been struggling to regain the long-term trend lines, so look for the trade to get crowded between $62.50 and $63.
Behind Qualcomm’s commanding lead, Apple (AAPL) and Samsung are neck and neck with 13% and 12% of new-to-market phones running on their chips while Strategy Analytics points to Spreadtrum (SPRD) as an underdog to watch. Unfortunately, SPRD just accepted a $31-a-share buyout offer from China’s state-owned Tsinghua Unigroup, so we won’t be seeing it for much longer.
If the tablet has the most growth potential, as it looks to, Apple has the trump card with 40% of all new devices running on its iPad platform. Investors have strong options about AAPL, and you probably have yours. While shares have been sold down to a nominally attractive P/E under 11, Wall Street is still steeled to see earnings retreat almost 11% this year before returning to trend in 2014.
Behind Apple, Texas Instruments (TXN) has roughly 13% of the market but looks rich according to just about any metric. Look for entry points closer to the 50-day line around $36, and if TXN breaks that support it may get significantly cheaper before it rebounds.
The Stock to Watch
Samsung makes the processors in 10% of the tablets currently being shipped, with NVIDIA (NVDA), Intel and a swarm of Asian chip makers adding up to the rest of the fragmented field. One up-and-comer here looks to be Marvell Technology (MRVL), with a product strong enough to get Samsung’s captive tablet unit to swap it in for its own processors. It might not be a buy right now, but it’s a company I’ll be keeping a very close eye on.
Hilary Kramer is the editor in chief of the subscription newsletters: Game Changers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return Portfolio and Inner Circle. Formerly, Hilary was the CIO of a $5 billion global private equity fund. She has an MBA from the Wharton School at the University of Pennsylvania and began her Wall Street career as an analyst at Morgan Stanley. Hilary is the author of The Little Book of Big Profits from Small Stocks (Wiley) and Ahead of the Curve: Nine Simple Ways to Create Wealth by Spotting Stock Trends (Free Press). To learn more about Hilary Kramer visit: http://GameChangerStocks.com.