Evidence of a speeding in the transition away from personal computers as consumers switch to tablets sent stocks of the biggest sector players into a tailspin on Thursday.
Late Wednesday, market research firm IDC, which has been tracking PC sales since 1994, reported a 14 percent decline in first quarter PC shipments, compared to the same period in 2012, the steepest decline since it began tracking the data.
The PC industry has been struggling to identify new products that will appeal to consumers who are increasingly migrating to smaller, lighter tablets and finding smartphones can do many of the tasks they once used a computer to do. Data from Gartner also shows a stunning decline of 11 percent in March quarter shipments.
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IDC also laid blame on Microsoft's Windows 8 software, which attempted to bridge the feel of a tablet with a traditional computer operating system, but consumers have not embraced the product.
"At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market," said Bob O'Donnell, IDC Program vice president, clients and displays, in a statement.
Microsoft was downgraded by at least three firms Thursday morning, including widely followed analyst Rick Sherlund, head of technology research at Nomura. Sherlund took the stock to "neutral" from "buy," but still sees it as a value play. Goldman Sachs, meanwhile, cut the stock to "sell" from "neutral."
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"Microsoft and some of the other tech names have had a big move over the last couple of days because some data points coming out of Asia, the manufacturers, that March was a pretty good month for building machines," said Sherlund in an interview on CNBC. "I think people were expecting PCs to be down about 7 percent in the quarter, and so down 11 to 14 when you are trying to calibrate how stable is this market, it just sort of feels like a very, very slippery slope."
Sherlund expects an upgrade cycle the industry has been waiting for to help but the deterioration has been much worse than expected.
"I think there is a good upgrade cycle coming later in the year if you can get these new ultrabook touch devices at $600 and get 10 hours of battery life because while a lot of consumers buy tablets, in fact we all do, half of us still produce content on a notebook so we have both devices, and these notebooks we're using are so out of date," he said. "So if you can get for $600 something that has 10 hours of battery life that's thin and lightweight…I think we'll start to get some benefit from that."
IDC said restructuring changes at Hewlett-Packard and Dell also added to the slowdown. Hewlett-Packard led the declines, suffering an approximately 23 percent decline in first quarter PC shipments, but it managed to hold onto its lead 15.7 percent market share. Dell shipments fell 10 percent globally, and 14 percent in the U.S. And IDC showed a 7.5 percent decline in Apple shipments. Meanwhile, Lenovo was an exception, gaining 13 percent.
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Citigroup said it remains bearish on PC hardware as there is still no material sign of recovery in demand, or even a stabilization. Citi is forecasting a 4 percent decline in PC shipments this year. The firm reiterated its "sell" rating on Hewlett Packard and said it expects HP to give up the number one PC spot later in the year, due to aggressive competition from Lenovo and other Asian manufacturers.
"While we realize only 10 percent of HP's profits come from PCs, we note our recent CIO survey reveals HP continues to lose business service market share which is also concerning," the analyst wrote in a note.
HP stock was off about 7 percent on Thursday. Gartner, in a note said it expects to see the installed base of consumer PCs in the U.S. decrease going forward, as consumers replace their PCs with other devices or retire them altogether.
"The real challenge we have is to calibrate how much of a secular decline are you experiencing and what kind of growth benefit can you get from an upgrade cycle. Everyone's getting a little nervous that this secular case is a little stronger on the downside than you had hoped for," Sherland said.
Sherlund said there are opportunities for Microsoft that he does not expect the current management to exploit. "Maybe you would say 'Windows team: it's time to stand on your own. We're not going to subsidize you anymore,'" he said. Microsoft could then go after the tablet market with its Office product, he added.