Low Cost Computing Poses Major Risk At PC & Tech Companies (DELL, HPQ, IBM, INTC, AMD, MU, STX, AAPL)

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Dell_logoWith earnings from the top two PC giants roughly two weeks away, we have many about what lies ahead for the tech sector.  Dell Inc. (NASDAQ: DELL) reports earnings on November 20, and Hewlett-Packard Company (NYSE: HPQ) reports on November 24.  It is far too soon to preview these earnings, but it is becoming clear that they along with their competitors and suppliers are being hurt by the slowing economy.

We have seen plenty of evidence from the likes of Intel Corp. (NASDAQ: INTC), Advanced Micro Devices (NYSE: AMD), Micron (NYSE: MU), Seagate Tech (NYSE: STX), and even from Apple (NASDAQ: AAPL) to know about the slow PC season.  This will be seen in the evidence below, but the rapid decline in orders from the end of September into October has been too difficult to not observe, and the trend shows no signs of slowing down.

What has become more surprising is the raw computing powerwhich can be purchased for such little money for normal-sized laptopsand regular desktops including monitors.  At first the "under $1,000"was the standard to reach.  Now there are many options for "under $500" and noweven "under $400" is getting easier and easier to find.  Here were someof the key deals we saw on Friday:

  • Best Buy’s lowest deal for $399.99… Acer Aspire Laptop with Intel®Pentium® Dual-Core Processor T3200 with 2GB DDR memory; DVD±RW/CD-RWdrive; 15.4" widescreen; 120GB hard drive; Windows Vista Home Premiumwith SP1
  • Circuit City’s best price $399.96… Acer EX5420-5038 15.4" WidescreenLaptop with AMD Athlon 64 X2 TK-57; 120GB hard drive; 2GB of DDR2memory; Built-in wireless 802.11bg; Burns DVDs and CDs; Built-in webcam
  • Wal-Mart’s best buy at $399.00… Everex 15.4" gBook VA1501V Laptop PCwith VIA C7-M Processor; 15.4" widescreen; 1.6 GHz Via C7-M processor;512 MB RAM; 120 GB hard drive; CD burner; Linux gOS V2 operatingsystem. We saw an online ad showing a 15" laptop special at $298.00, but we could not verify it at the source.

Another review was given today of the four most popular ultra-portableand light mini-laptops called net-books by the WSJ’s WaltMossberg.  We still consider them as a traveling worker or asemi-luxury items for those who want better web access and documentaccess than they can get from a cell phone, but the costs of netbooks have come down significantly.  Here is the cost and size of two of these modelsfor a comparison in name brands:

  • Dell Mini 9 at $399 with an 8.9-inch screen
  • Acer Aspire One at $349 with an 8.9-inch screen

Imac_logoApple Inc. (NASDAQ: AAPL) now offers its entry level MacBook for$999.00 and the Mac mini for only $599.00.  Traditionallythere are many more add-on costs there, but this is evidence that SteveJobs and friends are swooping down into lower-end andmodels to get more traction with a price-conscious consumer.  They arenot yet accommodating the iPoor..

So why do we feature sales items?  This is a simpleissue.  The consumer is in the toilet and can’t use credit to go makebig ticket items in the past.  Joe Public is going into cheap-o mode injust about every part of consumer spending.  So those in need of a newcomputer are going to buy lower-cost replacement PC’s now.  Technologyresearch firm Gartner has sharply cut its projections for globaltechnology spending next year.  Dell has announced layoffs, plantclosures, and worker furloughs to cut and its costs.  It lookslike thousands of engineers, consultants, and employees at the EDS unitof HP are getting pink-slipped.  Throw this in with what all thecompanies which supply processors, DRAM/SRAM, storage drive, graphicsprocessors, and even screens and there is no way to expect the numbersto be good.

Thinkpad_image_2Lenovo in China just showed how hard the current climate is thismorning.  Its shares lost one-fifth of their value after the company’sprofits fell by 78% and the company’s margin compressed more thanexpected.  The company also warned that the tough economic conditionshas consumers and businesses cutting back on technology spending. Whoever was responsible over at IBM (NYSE: IBM) for making theground-breaking decision to sell the PC unit should get free massagesfor life, with a happy ending.

All of the financial stabilization efforts and whatever bailout add-onswill come are going to all take time to implement.Credit is still elusive, jobs are still contracting, pay will go downas a result, and the consumer is still going to be spending less ahead.  Buyers are also buying what they feel are the deals nowrather than anything and everything they wanted in the past.  So, thesuper-computing power at prices this low combined with everything elseis going to lead to a lousy outlook from these companies.

This may not be the case perpetually.  There are many consumerswho buy high-end systems.  There are many that won’t go to cheap models no matter what.  But these computers being this powerful and at these sale prices are a goodspyglass view of what to expect ahead. 

Many consumers will opt for lower-end models, and that in turn is likely to lead to lower margins for the PC companies and their major component suppliers for some time.  It is becoming very clear that the business of making PC’s and manycomputing devices is at serious risk of having the same upside asmaking toasters and microwave ovens.

Jon C. Ogg
November 8, 2008