PCs – Two tides

RFM continues to see the growth in the PC market in 2014E.

• Intel increased its Q2 guidance as end-of –life XP machines are being upgraded much more quickly than expected.
• Q2E revenues will now be $13.4bn-$14.0bn up from previous guidance of $12.5bn-$13.5bn. This represents a mid-point increase of 5.3% and is nicely ahead of consensus at $13.0bn.
• Intel also lifted is FY14E revenue expectations from “approximately flat” to “some growth”,
• This is good news as it implies that Intel sees the strength of Q214E continuing for the balance of 2014E.
• Intel is attributing the sudden strengthening of demand to an increase in corporate PC shipments in response to Microsoft’s ending of support for Windows XP.
• Microsoft is no longer issuing security patches for Windows XP which, combined with a recent surge in cyber-attacks and successful hacks, has made companies expedite the upgrade.
• Upgrading a PC to Windows 7 or Windows 8 from XP will require a new machine in most instances and Intel’s strength is likely to be echoed by the rest of the PC supply chain.
• XP represents one rising tide but I continue to believe that tablet PCs will also drive the market in H2 2014. (see here).
• Computex saw the launch of very powerful PCs with no fans and all the workings crammed into a 7.2mm thick tablet.
• These devices are not going to be cheap but it is clear that they are aimed at replacing laptops not iPads or Galaxy Tabs.
• I expect to see more of these devices in the market in H2 2014E at prices low enough to kick start the beginnings of a laptop replacement cycle.
• This is the second tide which I expect to lift the PC market out of its slump and allow it to show some growth in 2014E.
• (RFM classifies Windows 8 tablets as PCs because they compete with laptops not content consumption driven devices like the iPad and Galaxy tabs).
• Consequently, I expect a round of upgrades for Intel and the PC supply chain which I am looking to be repeated towards the end of the year as hybrid tablet PC sales kick in.
• The rising PC tide floats all boats and this adds momentum to RFM’s positive stance on Microsoft.
• Intel, Microsoft, HPQ, Lenovo, Asustek and even HPQ will benefit from this trend.
• I would look to Microsoft, Intel and Asustek as the best way to gain exposure to a better than expected performance from the PC market in 2014E.