Personal computer sales continue to fall as customers shift their attention to tablets. Google Inc (NASDAQ:GOOG)’s Chromebook, however, has been bucking that trend. Since a Chromebook is pretty similar to a PC, these dual trends suggest a shift not away from PCs, but one toward cheap and easy.
First there was the Netbook
Before Apple Inc. (NASDAQ:AAPL) launched the iPad, the big craze in the PC market was the netbook. The draw was a mixture of small size, cheap price, and the use of solid state storage, which allowed for quick performance. Netbooks were perfect for someone who wanted a stripped down computer.
When the iPad came out, however, it quickly replaced the need for what amounted to tiny computers. As more tablets have hit the market, PC sales have been in a broad-based decline for more than a year and netbooks have fallen out of the limelight.
Only the Chromebook seems to be bucking that trend. The device has been on the market since 2011 and, according to Gartner research, has seen its market share about double over the past year. Although a low price is a key selling point, so, too, is convenience.
Like an iPad, Chromebooks are updated over the Internet automatically. Updating a Microsoft Corporation (NASDAQ:MSFT) Windows-based machine is hard to describe as automatic or easy. People like easy.
Easy is good
Apple Inc. (NASDAQ:AAPL) long ago realized that making its products work right out of the box was vital to its success. It focused on ease of use and found converts along the way.
Although Apple Inc. (NASDAQ:AAPL) will never partner with Google Inc (NASDAQ:GOOG) to launch a Chromebook, it could very well try to make a similar offering built off of its iPad OS. Such a move would fit well with the company’s penchant for building easy-to-use products and its need to come out with a new product offering to keep sales heading higher.
Even if Apple Inc. (NASDAQ:AAPL) doesn’t bring out a competing product, it still has a lock on the easy angle. That’s been an important part of the company’s impressive top and bottom line growth over the past decade, with sales going from $6 billion to $156 billion and earnings skyrocketing to over $44 a share from a meager $0.10.
Off around 40% from their highs because of concerns about slowing sales, shares now yield around 2.8%. This could be a good opportunity for growth and income investors to jump aboard a leader in the easy space.
Expensive
Google Inc (NASDAQ:GOOG), meanwhile, is taking a mixed approach with Chromebook, making its own and allowing other manufacturers to build them. Like so many of its offerings, it’s using advertising to make money. That said, the company is increasingly looking like a competitor to many of its partners. That’s a risky business shift, especially right now.
The company’s top-line continues to grow rapidly, but that’s covered up a profit margin drop of ten percentage points over the last two years. Lower margins in mobile advertising and the device area (notably cell phones) are two big reasons for the falloff. Chromebook’s success isn’t going to offset that trend.
Although Google Inc (NASDAQ:GOOG)’s price to earnings ratio of around 26 isn’t outlandish, it is high compared to Apple Inc. (NASDAQ:AAPL)’s PE of about 11. If investors sour on Google Inc (NASDAQ:GOOG)shares, the stock could fall fast and far. Investors need to monitor Google Inc (NASDAQ:GOOG)’s performance closely.
The shifting PC market
Even if Chromebooks really catch on, they probably won’t alter the trends in the computer space. For example, Hewlett-Packard Company (NYSE:HPQ) has been working on a turnaround for some time and sells a Chromebook. Only, the big shift the company is trying to pull off is to move into the services and software space.
A difficult PC market and a series of “house cleaning” moves left 2012’s bottom-line in the red and the top-line off about 5%, year-over-year. However, the shares have about doubled since late last year on signs of success under CEO Meg Whitman. It isn’t the Chromebook that investors are watching—its the shifting business model.
What’s it good for?
It’s impressive that Google has been so successful with the Chromebook, but that doesn’t make the company’s margin compression issues any easier to deal with. Investors should be wary. Apple Inc. (NASDAQ:AAPL) is already on to one of the core attractions of the Chromebook, ease of use. So its bargain priced shares might interest investors in search of growth and income. The other PC makers, however, are in a state of flux that Chromebooks only make more complicated. Aggressive types might try to pick winners and losers, but others are better off avoiding hardware makers like Dell Inc. (NASDAQ:DELL) and Hewlett-Packard Company (NYSE:HPQ) for now.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Tablets Aren’t the Only PC Ailment originally appeared on Fool.com is written by Reuben Brewer.
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