Alvin Chow 邹咏翰 wrote a post · Apr 12, 2023 11:28

Apple's 41% plunge in PC shipments, is it that bad?

The latest news reports indicate that PC shipments in the first quarter of 2023 have declined, with Apple being the biggest loser, experiencing a sharp 41% drop compared to the same period last year. While other competitors also saw decreases, their declines were relatively smaller in comparison.

As headlines can be misleading, I would like to present you with an analysis of the PC market to provide you with a more accurate understanding.

Lenovo (SEHK:992) is currently the largest PC company, holding a 22% market share in the first quarter of 2023. The PC segment is a key revenue driver for Lenovo, and it operates within the Intelligent Devices Group, which also offers other smart devices, such as tablets and phones, in addition to PCs.

According to Lenovo's financial reports for FY22, this segment accounted for 87% of the company's revenue. Therefore, any decline in PC shipments could have a significant impact on Lenovo's overall performance.

That said, Lenovo has demonstrated impressive growth in its PC segment, achieving a remarkable 92% increase in revenue over the past five years. As PC demand is cyclical, it is expected that the demand would wane at some point in time.

HP Inc (HPQ) holds the second position in the PC market, with a market share of 21% in the first quarter of 2023. PCs fall under the Personal Systems segment of HP Inc's business, which contributed to 70% of the company's revenue in FY22.

While HP Inc has also experienced growth in its Personal Systems segment, it has not been as substantial as Lenovo's. Over the past five years, HP Inc's sales in this segment increased by 17% in the last five years.

Dell holds the third position in the PC market, with a market share of 16.7% in the first quarter of 2023. The Client Solutions Group is responsible for PC sales at Dell and contributes to 57% of the company's revenue.

Over the past five years, Dell has achieved a 35% increase in sales for its Client Solutions Group, demonstrating growth in its PC segment too.

Apple holds the fourth position in the PC market, with a market share of 7.2%. Unlike other competitors, Apple is not as reliant on PC sales as a significant revenue source. Mac contributes to just 10% of Apple's revenue in FY22.

Therefore, even though Apple's PC sales have declined by 41% compared to the same period last year, it may not have as significant an impact on the company's overall financial performance.

Apple has also grown Mac sales by 58% in the last five years.

Here are my analyses.

First, the decline in PC shipments does not affect all companies equally. Lenovo would be impacted the most, while Apple would be affected the least. Despite news headlines indicating that Apple experienced the biggest drop in PC shipments, the financial impact on the company's revenue is minimal due to its relatively small reliance on the PC market. Therefore, it is crucial to look beyond the headlines and understand the specific context of each company's situation before making any conclusions.

Second, the PC industry is still growing, as evidenced by the revenue growth of the top PC makers, albeit at varying speeds. However, this growth is primarily driven by the larger players capturing market share from smaller ones, as demonstrated by the fact that the top four companies have increased their market share over the years, as shown in the chart below.

Therefore, while the PC industry as a whole may be growing, it may be increasingly difficult for smaller players to compete with the dominant market leaders.

Thirdly, the PC market is highly competitive, and as a result, profit margins are typically slim. For PC manufacturers, achieving a delicate balance between cost control and technological improvement is an ongoing challenge. However, Apple has been able to leverage its brand to charge a premium and increase its margins. While Apple does not provide a breakdown of operating profits by product line, we can look at the company's overall financials to gauge its performance. Apple's operating margin is currently at a robust 30%, compared to Lenovo, HP, and Dell's operating margins of 5%, 8%, and 6%, respectively.

Hence, Apple remains a superior stock relative to the rest of the PC makers, and the decline in PC shipments should not be a major concern for investors.

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