One peculiar outcome of the pandemic has been a newfound appreciation for the personal computer. The humble PC had been out of the spotlight for years. Eclipsed by the rise of smartphones, the PC had become a stale, dull, largely underappreciated appliance—technology’s toaster.
In 2019, when unit sales inched up just 2.7%, that actually was good news for the industry, because it was the first year of global unit growth since 2011. But last year, with schools, offices, retail stores, and most everything else shut down by Covid-19, the lowly PC became a lifeline, a means to stay in touch and keep working.
However, the average American household had barely more than one computer, which didn’t cut it for the typical family of four. The pandemic also underlined the need to upgrade to hardware capable of running videoconferencing and other essential software. Result: a personal computer boom. Sales rose 13.1% in 2020, says International Data Group, with a 14.2% jump expected for 2021.
This revival has boosted the fortunes of Apple (ticker: AAPL), Dell Technologies (DELL), and HP Inc. (HPQ). Earlier this year, demand jumped into ludicrous mode: In its March quarter, Apple posted 70% growth in Mac sales. In their April quarters, consumer PC sales rocketed upward by 72% at HP and 42% at Dell.
But booms don’t last forever, and this one is showing signs of aging. In Apple’s June quarter, Mac sales were up 16%—still impressive, but a clear deceleration. The PC peripherals company Logitech International (LOGI), which had a 66% sales jump in its June quarter, cautioned that its top line would be flattish for its March 2022 fiscal year.
That was all prelude to Thursday’s June-quarter earnings reports from Dell and HP. Investors were jittery heading into the announcements. For one thing, while the Delta variant might be muting the economic recovery, most schools are operating in person, and some businesses are beginning to return to the office. In addition, thesemiconductor component shortage is crimping growth at hardware companies, big and small.
As it turned out, there were good reasons to be nervous.
HP’s quarter was a bit of a stinker, though the company asserts that the issues were about supply, not demand. While profits handily beat guidance, thanks in part to some one-time gains, revenue, at $15.3 billion, missed the Street consensus by $600 million.
HP CEO Enrique Lores tells Barron’s that the company could have shipped more products if it had more parts, in particular cheap, low-end integrated circuits like microcontrollers. Lores says HP exited the quarter with a backlog equal to a full quarter of sales—the most ever. “We are selling everything we can produce,” he says.
Still, the numbers disappointed investors. Consumer PC revenue rose just 3%; commercial PC revenue was off 1%. At least in part, the latter reflected soft Chromebook sales, as schools slowed purchases. Lores is bullish on a rebound in enterprise demand as offices reopen. He sees Chromebook sales recovering by quarter end or shortly after, and consumer purchases being boosted by the coming rollout of Windows 11, the latest version of Microsoft’s flagship operating system. But the parts issue is clouding the picture and probably will remain an overhang on the stock, at least for now.
That’s particularly true, given Dell’s results. Dell’s sales growth accelerated to 15% in the latest quarter, versus 12% in the previous one. That was its best quarterly gain since 2018. At Dell’s PC-centric Client Solutions Group, revenue rose 27%, up from 20%, with gains of 17% from consumers and 32% from commercial customers.
In an interview, Dell CFO Tom Sweet said that both PC and enterprise hardware sales would have been even higher with better component availability. Like Lores, he sees the problem lingering into 2022. Sweet notes that Dell has kept margins flat, in part by ratcheting up prices to offset higher costs. Dell also seems to be managing its supply chain better than HP. And it’s clearly taking market share.
Still, Dell ’s enterprise hardware business came in a little light, and storage demand overall remains flat; the enterprise spending boom isn’t quite here yet. For the stock, the bigger issue was that results from VMware (VMW) disappointed the Street. Over half of Dell’s market cap reflects its 81% VMware stake, which it will spin off to Dell shareholders in early November. VMware’s earnings met expectations at the top line, but the business mix underwhelmed investors, who want a faster shift to the cloud.
That said, both HP and Dell should get a boost from an expected pickup in IT spending, and both stocks look cheap. HP bought back $1.5 billion of shares in the quarter, and Lores argues that it’s undervalued, with more buybacks coming.
As for Dell, it will use the proceeds from a special dividend that VMware will issue to holders, right before the spinoff, to pay down more than $10 billion in debt, a move that should spur ratings agencies to upgrade Dell’s credit to investment grade.
And while the air might slowly be coming out of the personal computer boom, the risks for both stocks look modest. HP trades for about eight times expected fiscal 2022 profits. Dell is nearly as cheap, and merits a fresh look when the dust settles on the VMware spinoff. Buy them both. And maybe a new PC, too; it could be time.
Write to Eric J. Savitz at [email protected]
