Slumping PC Sales Hint Soaring Memory Prices Are Sparking a Backlash Investors Should Know About
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In recent months, HP Inc. (HPQ) , Dell Technologies Inc. (DVMT) and other big DRAM and flash memory buyers have talked on earnings calls about how they've started to pass on higher memory prices -- a boon for the likes of Micron Technology Inc. (MU) and Western Digital Corp. (WDC) -- to their customers. The second-quarter PC sales data that just arrived suggests these price hikes are beginning to have a real impact on hardware demand.

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Research firm IDC estimates global PC shipments fell 3.3% annually in Q2 to 60.5 million units -- a reversal from Q1's estimated 0.6% drop, albeit slightly better than the firm's expectations for a 3.9% decline. Likewise, Gartner estimates PC shipments fell 4.3% to 61.1 million, after estimating a 2.4% Q1 drop.

Of note: IDC counts Chromebooks -- a strong point for the PC industry -- in its estimates, but not 2-in-1 devices such as Microsoft Corp.'s (MSFT) Surface Pro line. Gartner does the opposite.

Gartner analyst Mikako Kitagawa didn't mince words regarding the impact of component price hikes on shipments. "Higher PC prices due to the impact of component shortages for DRAM, solid state drives (SSDs) and LCD panels had a pronounced negative impact on PC demand in the second quarter of 2017," she said. IDC, for its part, says its original downbeat forecast for Q2 sales assumed higher prices would have the effect of "inhibiting shipments."

Continuing a multi-year trend, the world's biggest PC makers took share in Q2 from smaller firms with less economies of scale -- important when negotiating memory contracts, among other things -- a smaller marketing and R&D budgets. IDC thinks the industry's top 5 vendors claimed a 74.3% unit share, up from 71.7% a year ago.

The firm estimates market leader HP's share rose to 22.8% from 20.7% on the back of 6.2% shipment growth. Lenovo, hurt by weak Asian demand and high Chinese inventories, is granted a 20.5% share, down from 21.1%. Dell's share is believed to have risen to 17.1% from 15.9%.

Apple Inc. (AAPL) , which reported its Mac revenue rose 14% annually in the March quarter on the back of 4% unit growth, is assigned a 7.2% unit share, up from 6.8%. With Apple's Mac ASP close to $1,400 in Q1, its revenue share was probably above 15%. Asus rounds out the top 5 with an estimated 6.8% share, down from 7.2%.

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It's possible that PC growth rates could improve again in the second half of the year. As IDC notes, a corporate upgrade cycle continues to unfold, aided by interest in Windows 10 features that are only available on newer Intel-powered systems. And consumer interest in high-end PCs such as powerful gaming systems and sleek thin-and-light notebooks and 2-in-1s remains healthy.

In addition, the deflationary impact of a more competitive PC CPU market could help offset the inflationary impact of higher memory prices. The arrival of AMD Inc.'s (AMD) aggressively-priced Ryzen desktop CPUs, which put the company on much better footing in the mid-range and high-end desktop markets than it has been in a while, already seems to have led Intel Corp. (INTC) to speed up its desktop launch schedule and price more competitively. We could something similar happen in the notebook market after AMD processors pairing a Ryzen CPU and a GPU based on the company's new Vega architecture start arriving later this year.

But for now, the DRAM and (to a lesser extent) flash price surge seen since last fall is bringing back memories of the PC industry's 2015 and 2016 woes. It's also not far-fetched to imagine higher DRAM prices impacting consumption in other key markets, such as servers and cheaper smartphones. All of this might help explain why Micron, though insisting DRAM industry's supply/demand balance remains favorable, offered a more tempered outlook for further DRAM price gains during its late-June earnings call than some bulls were hoping.

None of this means that DRAM demand (never mind flash demand) is set to collapse due to higher prices. Especially when the memory industry stands to have two big second-half tailwinds: Pent-up enterprise and cloud demand for servers powered by Intel's just-launched Xeon Scalable CPU line, and Apple's big iPhone 8/7S production ramp (pushed back a little by iPhone 8 production challenges, but still bound to be huge).

But as Micron CFO Ernie Maddock said during his company's call, it "isn't always advisable to bank on continued aggressive quarter-on-quarter pricing increases" following several quarters of such gains. Especially when your end-users are starting to respond to price hikes by changing their buying habits.

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