Dell poised to benefit most from PC market recovery

Maybe Dell's dark days are finally over.

All signs are pointing to an improved PC market that will start to materialize later this year and really regain ground next year. Dell, the PC maker that's arguably been battered most by the downturn, also stands to make the greatest gains when the seas begin to calm.

Why Dell? The key to a full turnaround within the PC industry is when large corporate customers start buying computers for their employees again. Many had virtually stopped making new PC purchases due to increasingly tight budgets, combined with decisions to wait until Microsoft released the update to its operating system.

But there have been three good signs this week that point to an imminent recovery for the industry. On Monday, Dell took the trouble to send a press release announcing that it's seeing the demand for its products--PCs, services, servers--"stabilizing." That means more people and businesses are shopping, which it said will send its second-quarter revenue up slightly when it reports next month.

That was followed by Intel's upbeat outlookduring its second-quarter results Tuesday. Intel's feel for the market is an important bellwether for the tech industry, and the chipmaker reported its best first-to-second-quarter growth in almost two decades. CEO Paul Otellini declared it a "clear expectation for a seasonally stronger second half."

Wednesday's study from PC market analysts at IDC showing better-than-expected growth worldwide in PC shipments serves to tie all the news together. For the second straight quarter, PC shipments were down, but beat expectations. Shipments were down just 3.1 percent last quarter, according to IDC. A recovery, it seems, is on the way.

Both Dell and Hewlett-Packard, the world's largest PC maker for several years running, will benefit when the recovery does start to kick in. Both are heavyweights in corporate computing. But HP has survived the tech industry slowdown better than Dell due to strong management, cost cutting, and its ability to react quickly to emerging consumer trends like Netbooks.

So when companies do start to spend money in large volume again this fall when Windows 7 is released, and into next year as budgets soften, Dell's improvement should be relatively better overall than HP's--if only because HP hasn't slipped that much in the past months. HP's shipments improved 3.6 percent in the most recent quarter; Dell's shrunk 17.1 percent.

The last few years have been rough for Dell. The company appeared caught off guard by the surge in consumer spending on laptops starting in 2006. HP (and Acer) recognized the change in the market, made some successful adjustments, and never looked back. Since then, Dell has employed several new tactics to invigorate its business, including getting back into retail, focusing more on product design, shaking up the organizational structure, and looking to shed costs through shutting down some manufacturing plants and several rounds of layoffs.

Though Dell is still trying to get its costs right, it has, however, paid a lot of attention to improving the breadth of its consumer offerings recently. It released the very pricey Adamo notebook several months ago and has also shipped more models of lower-priced Inspiron Mini Netbooks. While that hasn't reaped great results yet (its most recent earnings saw a fall of 63 percent), once the market is more stable, a wider variety of choices for consumers and its corporate customers should help.

And though Acer has gathered a lot of attention recently for its aggressive pricing and huge growth in the consumer market, an improvement in commercial spending could temper that momentum some.

"When we get to commercial recovery, (Acer) won't be as well-positioned as HP and Dell," said Loren Loverde, PC analyst for IDC. "They're still a smaller player in the U.S., and are half the size of Dell and HP. They don't have quite the scale in the U.S."

Acer's focus on selling more units at lower prices may also come back to bite it. When consumers are ready to buy more expensive systems--which carry better margins for the manufacturer--they're not likely to think of Acer, or its premium Gateway brand.

The others
Lenovo will continue to struggle while it figures out what kind of company it wants to be. It's still in the middle of navigating major management changes, and has had difficulty in kick-starting its consumer business. But the crown jewel, the ThinkPad business, can only be helped when companies begin to spend money on computers again. The company is well-established in China, a country that is still a growing market for new PCs.

Toshiba is heavily invested in the consumer market and particularly in small and medium businesses. As commercial and consumer spending go up, Toshiba should benefit with increased market share.

Now, when exactly this turnaround will happen is not entirely clear. Some analyst say the return to normalcy will begin later this fall, but it won't be complete until 2011. It will likely be gradual, and as Intel's Otellini noted earlier this week, when it does arrive, we should be prepared that it won't be a "recovery to prior levels."