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Does the PC Industry's Long-Term Future Hinge on the Success of Budget Laptops?

- By Emily Wolff

Entering its 40s, the PC industry is showing signs of age. According to separate but similar findings of research groups Gartner (IT) and International Data Corp., 2016 was the fifth year in a row that demand for PCs fell with losses estimated at up to 6.2% year on year.

Although the last quarter of 2016 was more promising than the previous three, PC shipments had already plummeted in 2015 and did not recover. The year 2016 drew to a close with fewer than 300 million units shipped globally for the first time since 2008 (just after the launch of the iPhone).

If the industry is ailing, there are multiple diagnoses. First, smartphones and tablets give the PC a run for its money on the metrics that seem to matter most in today's fast-paced world: mobility and user-friendliness. In addition, the PC industry is arguably one of the most competitive industries in the world. Stiff competition exerts downward pressure on prices for both operating systems and hardware, forcing vendors to sell at low margins.

The effect is compounded by a strong dollar and weak yen, giving Japanese competitors a cost advantage. Furthermore, turning a profit relies on shortening product life cycles and recycling the fleet on a semiregular basis - but PC consumers may not see the need to keep up with this pace of upgrading. Finally, as Intel Corp. (INTC) makes key chips for many PCs, innovation and product cycles are constrained by Intel's ability to produce new chips, which is becoming more difficult.

But computer companies have pushed back against those who have written them off, and analysts would be remiss not to acknowledge how. Take the computing giant formerly known as Hewlett-Packard as the bellwether of change. In 2015, the industry leader split into HP Inc. (HPQ), focusing on consumer-facing PCs and printers, and Hewlett-Packard Enterprise (HPE), focusing on business-facing hardware and cloud. For many observers, the future looked bleak. A year later, analysts at Credit Suisse were forecasting a fall by 9% in HP's PC sales.

However, in defiance of gloomy naysayers, HP's first quarter earnings from 2017 indicate that it was able to weather the storm. Earnings were up by 5.56% year on year, exceeding expectations, and net revenue from its PC segment up by 10% year on year. How did HP prove its skeptics wrong? Dion Weisler, chief executive of HP, has said he keeps an eye on "pockets of growth" for companies like his to exploit.

One such window of opportunity presented itself in 2011 when Alphabet Inc. (GOOG)(GOOGL)'s first Chromebooks from Acer (2353.TW) and Samsung (005930.KS) hit the market, and the budget laptop was born. In turn, Microsoft (MSFT) dropped its fees exponentially for systems in the sub-$240 price range, allowing for lower retail prices and entry into the emerging budget market. "We are not ceding the market to anyone," Microsoft Chief Operating Officer Kevin Turner reportedly declared.

HP's ability to tap into this trend may explain its resilience in the face of challenging conditions. Its 15-F222WM notebook, ringing in at under $300, has fared particularly well in 2017 despite the ample choice consumers enjoy between worthy competitors Samsung, Acer and Lenovo among others. For more information on HP's potential rivals in the budget market space you can read the best budget laptops under $300 guide on trustedbeasts.com.

A Forbes tech columnist wrote in 2013 that the success of computer companies tracks their ability to deliver high mobility devices. At the time, he cited Apple (AAPL), Lenovo (HKSE:00992) and Samsung's move into smartphone and tablets as a reason for their success, and HP's failure to do so as justification for its faltering position.

HP's surge in 2017 complicates this claim. As computers become ever more salient features of the modern working and personal life, demand at the lower end of the market swells. While Apple occupies - and dominates - the high end market, other companies may find their ability to meet demand at the lower end of the market their redeeming feature.

At the same time, budget laptops are just one of many windows left to open. Weisler cited the photocopier market and commercial tablet systems (in hospitals and schools) as key "pockets of growth."

Virtual reality technology and improvements in gaming and graphics processing technologies, such as shrinking nodes from 28nm to 14nm, have offset losses up until now and can be expected to continue to do so. The PC industry may be aging, but investors have every reason to believe that it can find new ways to keep itself relevant.

Disclosure: No position in stocks mentioned in this article.

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This article first appeared on GuruFocus.