By Adam Levine

The PC business is still struggling with the aftermath of Covid. The latest earnings reports from HP and Dell Technologies make that abundantly clear.

In midday trading Wednesday, HP and Dell stocks were both down more than 12%. PCs are the largest part of HP's business and weigh heavily on results. Dell's outlook disappointed Wall Street due to weakness in PCs.

With workers and students at home, the Covid-19 pandemic spurred a surge in PC sales in 2020, and especially 2021, when about 340 million PCs were sold, according to market research firms Gartner, IDC, and Canalys. PC unit sales were up 29% from before the pandemic, after years of no growth in the mature low-margin sector.

That remains the high-water mark. In 2023 PC unit sales were down 27% from 2021, and still 6% below prepandemic levels. In the third quarter of 2024, unit sales were flat with the previous year.

Many analysts had viewed the second half of 2024 as the beginning of the recovery, driven by a trio of catalysts. First, those 2020 and 2021 PCs are now three or four years old and may be in need of a refresh. Second, Windows 11 uptake has been slow, but Microsoft is ending free support for Windows 10 in 2025, perhaps pushing PC owners to make new purchases. Finally, this summer saw the release of new AI PCs that can do AI tasks on-device, potentially driving additional refreshes.

But the PC rebound has yet to materialize. "I think a lot of analysts, myself included, kept waiting for this PC recovery to occur," Edward Jones analyst Dave Heger told Barron's noting HP, where unit sales grew by 1%. "And it is occurring, you're seeing units grow year over year, but it's certainly not been a robust recovery."

Over the last nine months, HP PC sales are up 3% but down 16% from the same period in 2021. Dell's PC sales are down 2% from last year, and down 17% from 2021. In contrast, Dell's server and networking business is up 61% during the stretch.

"The PC refresh continues to move out," Dell chief operating officer Jeffrey Clarke said on the company's earnings call. "It was the source of our underrun in Q3, and we're kind of reflecting that through the balance of the year."

So why haven't the anticipated catalysts sent PC growth higher?

Pandemic PCs may be getting a little old, but many companies and users have pushed replacement cycles out to five or even six years, and longer for consumers, according to Gartner. Those 2020 and 2021 PCs may have some life left in them.

Free Windows 10 support doesn't end until October 2025, so PC buyers have almost a year to make up their minds about a new Windows 11 PC. Windows 10 users will also have the option to pay Microsoft $30 for an extended year of Windows 10 security support. That can add up quickly for large IT departments, but it's much cheaper than buying all-new PCs.

Finally, AI PC sales are ramping rather quickly, with HP reporting that 15% of its unit sales were AI PCs in their first quarter on the market. But they seem to be replacement purchases as opposed to driving all new demand. HP PC units overall were up just 1% in its last quarter. Buyers may be waiting for an AI feature that makes the whole PC worth buying.

HP is still confident the catalysts will materialize in 2025. "When we think about next year, first of all, we think that the Windows refresh has started in a slower way than previous transitions," HP CEO Enrique Lores said on Tuesday's earnings call. "This just makes the opportunity in 2025 bigger..."

But not that big. For now, HP is forecasting 2025 PC growth in the mid single digits.

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

November 27, 2024 14:54 ET (19:54 GMT)

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