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Dell and "the end of the PC era"

18 Nov 2012 by Jim Fickett.

In a story on Dell and HP earnings last Friday, Bloomberg opened the article with

The PC era is ending.

Perhaps a tad extreme.

Tablets are indeed a very big deal, and I'm quite excited about the change that tablets are bringing to computing. Even more important than the form factor, the biggest innovation in tablets is that many people who have never been comfortable with computers can interact more directly with photos, web pages, documents etc, without having to deal at all with operating system stuff like searching for files and copying them to the right place. So more people are able to do more with computers, and that's pretty cool.

But at the same time, armies of bookkeepers, researchers, professors, software developers, IT departments, designers, writers, editors, bankers, analysts, etc. will continue to need bigger screens and a keyboard to get their work done. And nobody is going to run compute farms for web searching and cloud data management with tablets. The PC is not going away any time soon.

The evidence presented in the article that the PC is going away is,

  • Dell and HP are having a rough time, and
  • Overall, PC sales are down 8% year-over-year

Part of this is that the electronics industry in general is having a hard time right now. Video games sales are down too, but games are not going away. TV sales are down, but it is most certainly not the end of the TV era (more's the pity). Amazon reported a net loss last quarter, but Amazon is not going away.

Probably there is some real, permanent shift of a part of the population. Suppose that 1/3 of all PCs will be replaced with tablets. And suppose that computers are replaced, on average, every four years. Then we'd see PC sales fall about 8% per year for a while, and then stabilize. Obviously, reality is not that simple, whatever is really happening, but this illustrates the point that some shrinkage followed by stabilization is likely realistic.

Still, people love to feel like they are in the know on a new trend, so the “end of the PC” meme struck a chord, and Dell's stock price fell dramatically (it closed Friday under $9, down from a peak of about $18 in February). So is Dell a bargain now?

I don't know yet, but the possibility looks interesting. Dell is in the midst of a major strategic shift, concentrating less on the retail PC market and more on servers and services. So it is a little difficult to estimate what the long-term might look like. But just to get a first idea, look at free cash flow, taking out ordinary capital expenditures but not acquisitions, since the latter probably have more to do with the one-time strategic shift:

The average free cash flow over the last 11 years is $3.3 billion (the dashed line), and the most recent (rather dismal) year is $2.1 billion (estimated as 4/3 times the sum for the first three quarters). The market cap is $15.4 billion. So the price-to-free-cash-flow ratio is 4.7 for the long-term average, and 7.3 for the most recent year. That suggests the current price only makes sense if Dell is really headed for the rocks. If, on the other hand, it can indeed execute its strategy of depending less on the consumer market, the price might be attractive.

Probably worth a closer look.