Beware PC Sector 'Value' Plays

Money is flowing from the PC sector to mobile phones. For investors, fighting the trend may be futile and expensive.

Microsoft's (MSFT - commentary - Cramer's Take) disappointing outlook is only the latest twist in the epic phone/PC tug-of-war that has unfolded over the past 12 months.

It's Texas Instruments (TXN - commentary - Cramer's Take) vs. Intel (INTC - commentary - Cramer's Take).

It's Nokia (NOK - commentary - Cramer's Take) vs. Dell (DELL - commentary - Cramer's Take).

Over the past year, the biggest phone-chip vendor, Texas Instruments, is up roughly 40%; the biggest PC chip vendor, Intel, is down roughly 20%. The biggest phone brand, Nokia, is up around 40%; the biggest PC brand, Dell, is down about 20%. A spooky coincidence? Hardly.

By several valuation metrics, the PC giants seem like bargains. The price-to-sales ratios of Dell, Intel and Microsoft may seem mouth-watering when compared with those of their peers in the mobile telephony sector, but the market abhors the absence of growth. The computer sector has failed to address the developing markets, just as the phone industry has found a new groove in Asia, Africa and Latin America. We're dealing with profound changes in consumer behavior. Mobile messaging is outpacing email in many key markets, and $50-$80 handsets are becoming the must-have household IT item, pushing low-end PCs out of the family budget.

Meanwhile, Microsoft is putting enormous effort into developing and marketing the $400 Xbox 360 and the $600-$800 Windows smartphones. There is a deep disconnect here between where the market growth is and where the PC giants are heading.

The mobile momentum in developing markets may seem like a cliche by now, but it was anything but obvious just half a decade ago. In 2001, Russia had only 8 million mobile subscribers. In 2006, mobile-phone sales in Russia are expected to be as high as 38 million units.

Although growth in China took off earlier, India and the Middle East mirror Russia as relatively late bloomers where phone sales took off around 2003-04. This is partly due to operator consolidation, but much of it can be attributed to product development that fits the needs of low-income consumers.

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Tero Kuittinen is a senior product specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. At the time of publication, Kuittinen had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback; click here to send an email.