New numbers show just how bad PCs are doing. But there are places to hide in tech

Published Tue, Oct 11 20223:18 PM EDTUpdated Tue, Oct 11 20224:06 PM EDT

We know that the personal computer business has recently been terrible. Demand pulled forward by people setting up home offices during the Covid pandemic fell off a cliff as workers are called back. Now, there are new reports out that show industry shipment declines not seen in more than two decades. The dismal numbers put into sharper focus what we've been hearing from the likes of chipmaker Advanced Micro Devices (AMD), which blamed PCs in last week's revenue warning. However, as Club members also know, certain end markets are more resilient than others, which offers solace and supports our feeling that investors are better off riding out this tough earnings season in companies with more enterprise exposure — like cloud, cybersecurity and digital transformation — and less consumer exposure. PC shipments drop sharply This week, Gartner published preliminary quarterly data on worldwide personal commuter shipments, estimating a 19.5% decline compared to the third quarter of 2021. Another group that also tracks the PC business, IDC, reported an annual decline in global shipments of 15% in the third quarter. Both firms said those declines were the worst since the mid-1990s. According to Gartner, the major issue plaguing the PC business is that supply chain dynamics began to improve and inventory was built up just as demand started to weaken. One notable divergence between the two reports relates to Apple's (AAPL) global computer shipments. Gartner data points to a 15.6% annual decline in the third quarter, whereas IDC reports a 40% gain as Apple made up orders they missed in the second quarter and held promotions on M1 Macs. It's another example of why we don't like the idea of trading Apple in the first place — and especially not on supplier checks. Gartner also acknowledged a clearing of the backlogs but said Apple was not immune to the global macro slowdown. In statements to CNBC, neither IDC nor Gartner would speak to the other's data or why the Apple numbers were so different. Analysts at Barclays appear to side with IDC on this one, commenting in a note published on Monday that expect "much higher MacBook shipments" driven by M2 versions of the MacBook Air and Pro. No matter how you slice it, the consumer PC market is clearly a headwind for semiconductor companies — which we explained in a commentary Monday about reducing our Club exposure to the sector — and those that sell consumer hardware. As it relates to Apple, the results may not be all that negative as even Gartner believes Apple took market share in the quarter — noting that globally, the company's share of the PC market rose to 8.5% from 8.1% in the year ago period. CIO survey on enterprise While the consumer tech takeaway is a clear-cut negative, we got the results of the latest CIO survey from Morgan Stanley Tuesday morning that bode a bit better for those companies exposed to the enterprise market. While geared toward what the results mean for Microsoft (MSFT), the survey also shed light more broadly on how chief information officers view the current economic climate. According to the survey, the highest CIO priorities — and where spending is expected to grow the most — remain cloud computing, software security, the broader digital transformation, as well as data storage and analytics. As this relates to our portfolio, the analysts believe that Microsoft stands to be the biggest wallet share gainer in 2022 followed by Amazon (AMZN) and Alphabet 's (GOOGL) Google. Though it's hard to ignore the foreign currency and PC headwinds Microsoft is up against. While the consumer businesses at the three tech giants are unlikely to avoid the headwinds of a macroeconomic slowdown, Microsoft's cloud business should provide something of a buffer to blunt the blow. The same can be said for Amazon, thanks to AWS, and for Alphabet thanks to the adoption and rapid growth of Google Cloud. It's worth noting that Google's online ad business will be heavily correlated to the broader economic backdrop. In the end, there was little in any of this research that would prompt us to go out and buy shares right now. However, on a longer time horizon, we believe the secular growth thesis as it relates to cloud computing, cyber security, and the broader digital transformation remain firmly intact and warrants the names exposed to these trends being at the top of investor watchlists for the when the macro situation starts to show signs of improvement. (Jim Cramer's Charitable Trust is long AMD, AAPL, MSFT, GOOGL and AMZN. See here for a full list of the stocks.) 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