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Why Merger Mania Is Bearish for PC Stocks


Consumer spending on technology isn't dead; PCs just aren't that hot and it's a drag on sentiment.


With the exception of Apple (AAPL), I've been notably bearish on PC-industry stocks.

On July 7, I said the following in Why It's Time to Dump PC Stocks:

PCs aren't dying, but that's not the point. The key takeaway is that the PC supply chain is being disrupted by the iPad, and that's a sentiment killer. The iPad is nothing like existing computers and that may explain why PC supply-chain stocks have been in the dumps this year despite a booming end market.

Going forward, PC-industry stocks are dead money. The bull case for stocks like NVIDIA (NVDA) and Seagate (STX) will always sound very reasonable -- cheap valuations and strong industry unit growth. These are true statements, but they've been true for years, and the stocks haven't reacted.

And on August 20, I wrote Six Reasons Why PC Stocks Haven't Bottomed Yet, and included Intel's (INTC) purchase of McAfee (MFE), the disruptive nature of Apple's iPad, and weak back-to-school outlooks from both Hewlett-Packard (HPQ) and Dell (DELL).

Believe it or not, my list of reasons for calling PC-industry stocks "value traps" is only getting longer, and it starts with the new wave of deal activity among companies in the PC supply chain:

1. Intel's Still Shopping in the Wake of a Revenue Warning

On August 27, the company said third-quarter revenues would come in at $10.8 to $11.2 billion, just a month after giving surprisingly bullish guidance of $11.2 to $12 billion -- a reduction of 13% at the midpoint.

Just three days later, Intel announced that it's buying Infineon's (IFX) wireless-chip unit for $1.4 billion -- a move which, like its recent purchase of McAfee, is aimed at reducing reliance upon PC unit-shipment numbers.

Call me crazy, but it seems like Intel is shopping for new business lines precisely because it's worried about the health of the PC industry.

2. Dell and HP's Tug-of-War Over 3Par (PAR)

Like Intel, Dell and HP need diversification away from the PC business, and they have the same object of affection: storage company 3Par, which is starting to resemble Bella from Twilight.

This bidding war is especially disturbing because it gives us three PC companies struggling to diversify exactly when business is heading downhill.

3. We're Probably Closer to the Top Than the Bottom in Terms of Unit Growth

In the third quarter of 2009, Gartner pegged global PC unit growth at just 0.5%.

Over the next three quarters, growth was 22%, 27%, and 21% -- much better than Gartner had expected. Those days are clearly over.

Intel's pre-announced revenue shortfall confirmed rumors of rapid deterioration in PC demand -- again, during the typically strong back-to-school season. That tells me that there's more room to fall because a lousy back-to-school season, which is a time when students buy computers because they need them, doesn't bode well for the holidays.

And the bad thing about 20%-plus growth numbers is that they make for very tough year-over-year comparisons in the future. Don't be surprised if the PC market actually shrinks in the fourth quarter of this year.

4. Smartphone Sales Are Holding Up

According to all indications, consumers haven't stopped buying smartphones. Google (GOOG) CEO Eric Schmidt recently said that Android-powered phones were activated at a rate of 200K per day in August, up from 160K in June. Plus, Apple's iPhone 4 remains back-ordered three weeks, as it has been since its June release.

What does this tell us?

The outlook for consumer spending on technology isn't dead, it's just clearly favoring newer, more innovative wireless devices.

PCs just ain't that hot, and that's a drag on sentiment.

Add It Up

So put it all together, and we're seeing the following happen all at once:

1. Key PC industry players Intel, Dell, and HP hungry to make deals to diversify away from PCs.

2. Demand suddenly falling off a cliff after three straight fantastic quarters.

3. A shift in consumer interest in and spending on wireless devices.

So why buy these stocks again?

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Positions in AAPL and MOT.
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