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Tickers in this Article: CY, AMD, FCS, DELL, HPQ, INTC
Think the PC market is back in full swing across the board? The superficial numbers being touted by the industry certainly suggest it is. Before we get too gung-ho, however, let's add an important footnote.
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The Good
The PC industry saw improvements in the third quarter. IT advisory company Gartner said personal computer shipments were up 0.5% during Q3 2009 versus the same quarter a year ago. Information technology and market research firm International Data Corporation (IDC) concluded that Q3's PC shipments were 2.3% higher on a year-over-year (YOY) basis. Either way, we get the idea. The numbers are better than they were.

And, those numbers were reflected in the results of some pretty big names. Though down 8% compared to last year's Q3, processor maker Intel (Nasdaq: INTC) reported an 18% increase in the top line between Q2 and Q3. Hewlett-Packard (NYSE: HPQ) saw its market share slip slightly, yet its total number of units shipped during Q3 increased by 9%. Acer saw a whopping 23.6% increase in Q3 shipments on a YOY basis.

So, all is well? Not quite.

The Bad
Cypress Semiconductor Corp. (NYSE: CY) may have topped earnings expectations of 6 cents per share last quarter, but even on an operating basis the 10 cents it earned is not in the same ballpark as last year's 86 cents. Fairchild Semiconductor (NYSE: FCS) did the same song and dance - a 90% dip in quarterly earnings (YOY) that still beat expectations. Fairchild's revenues were off by 23%, though; Cypress Semiconductor's were lower by 20%.

Thus, the market didn't care about the "beat", sending both stocks lower on the drastic earnings and sales dips.

It wasn't just chipmakers hitting a wall, either. Dell (Nasdaq: DELL), in calendar (not fiscal) Q3, actually saw an 8.4% dip in total PC shipments.

Other processor makers didn't necessarily fare much better than the chipmakers, though I suppose you could count the fact that Advanced Micro Devices (NYSE: AMD) moved from a 22 cents per share loss last year to "only" an 18 cent loss this year as a win.

So how did Intel do so, well, at least reasonably well? After all, it doesn't really make sense for PC unit sales to be up while so many of these players are not doing commensurately well. Keep reading.

The Point
Don't be bamboozled by the stronger shipments of individual PC units. Yes, the total number of computers sold is on the rise, but the average price of the computer sold is on the decline.

In Q2, growth in sales of the considerably cheaper netbooks was nearly double that of ordinary laptops. Overall netbook sales came in 37% higher than the same quarter a year ago and are up 265% year-to-date. Though the official Q3 numbers aren't in yet, nothing suggests the trend will be different in Q3 and Q4. That's the good news.

So what? The "so what" is more units means less dollars - and less profits.

The low-priced category may account for 22.2% of total PC sales, but it only makes up 11.7% of the PC industry's revenues. And, while the net percentage margins on an individual netbook have been said to be higher as well as lower (depending on the source) than laptops or desktops, the lower-end computers can't be a boost to total earnings simply because their top line is smaller. Moreover, their low prices force the selling price of other computers lower, hurting total margins indirectly.

Translation: Consumers are gravitating toward the super-cheap, perhaps unwilling or unable to dive into a higher-end (and more profitable) laptop or desktop computer.

Even Worse
As another layer of evidence to the theory, get this: As of last quarter, Acer has surpassed Dell to take over the No.2 spot in overall PC market share. Acer's total shipments jumped 48.3% last quarter, while Dell's fell 13.4%.

For those of you who know PCs - and I say this with respect to Acer - you'll know the brand was built on low prices without a lot of concern for tremendous quality. The stigma is deservedly changing, but the Acer name is still associated with compelling (i.e. low) prices.

As for Intel, the company makes the Atom processor - the one used by the bulk of all netbooks made. Had it not been for Atom, Intel acknowledges the quarterly results wouldn't have been nearly as impressive.

When you put it all together, the chip, processor and PC industry may not be mended. It may just be on the life support offered by netbooks and cheap PCs. That's not a long-term growth solution. (To learn more, see The Industry Handbook: The Semiconductor Industry.)

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