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A Huge Tech Trend is Accelerating in Apple's Favor

By Frank Curzio, editor, Small Stock Specialist
Friday, August 26, 2011

On August 19, Hewlett-Packard dropped another bomb on its investors.
After reporting disappointing earnings in May, the largest personal computer (PC) manufacturer in the world said it will no longer sell personal computers. That's like McDonald's announcing it won't sell hamburgers anymore.
PCs account for 30% of HP's operating revenue. The company said it will sell this segment and focus more on its higher-margin software and services division.
Following the news, shares of HP plunged 20%. That's a massive one-day move for a large-cap company. 
Overall, HP's exit of its PC segment is not surprising. Margins and sales are contracting with each passing quarter. That's because sales of tablets – like Apple's iPad and Motorola's Xoom – are soaring.
I talked about these trends in February, calling it "the death of the PC industry"...
According to Goldman Sachs, tablets will replace one in every three PCs in 2011. That forecast was made in December 2010. Back then, Goldman predicted Apple would sell only 37 million iPad tablets in 2011. Today, those estimates are north of 55 million – 50% higher than the original forecast.
Since my last essay, these trends have accelerated.
According to data from tech research firm Gartner, the three largest PC vendors in the world are HP, China's Acer Group, and Dell. Together, they account for roughly 45% of the market. PC sales from these three vendors are down an astonishing 17% from first quarter 2010 to first quarter 2011.
Tablets are moving in the opposite direction. According to research firm iSuppli, about 62 million tablets will be sold in 2011. That's roughly 4 million more than the company predicted just three months ago. Only 18 million tablets were sold in 2010.
Six years ago, IBM left the PC market. The tech giant sold its PC division to China's Lenovo Group. IBM is now four times the size of HP.
So I give credit to HP for looking to sell its PC division. Better late than never. The PC segment would weigh on margins. In other words, with 30% of its business tied up in that, HP would have trouble growing its bottom line.
That leaves Dell as the major U.S. player in the space. CEO and founder Michael Dell has been buying shares of his company at current prices. But that doesn't necessarily mean Dell's stock is cheap. And as long as the company's primary business is selling PCs, I suggest avoiding the stock.
The biggest beneficiary of the decline in PC sales is Apple. The stock got hit on Thursday after Steve Jobs announced he was stepping down as CEO. I would use the pullback as a buying opportunity.
Good investing,
Frank Curzio

Further Reading:

The biggest winners in this tech trend are the companies making the parts that appear in every gadget you buy. Whatever the latest fad, these businesses are poised to profit. Get the story here: You Don't Have to Believe the Hype to Make Money Off It.

In The Daily Crux
Market Notes
Gold miner index GDX has outperformed gold by 5% over the past week.
Silver builds a fresh uptrend... up 20% over the past two months.
Market hopes for hints of "QE3" during Bernanke's speech from Jackson Hole, Wyoming on Friday.
Consumer stocks are holding up... Coca-Cola, Ambev, Unilever, and Colgate-Palmolive are all near 52-week highs.
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