Back in 2010, the personal computer (PC) was having a banner year. Sales reached an all-time high of 350 million units, a 13.8% increase over the prior year. In early 2011, Gartner, a leading IT research firm, projected that PC sales would increase another 15.9% in the coming year, to 406 million units.

But that projection—which reflected the industry’s expectations in general—turned out to be wildly optimistic. Actual sales were 365 million units, 11% under Gartner’s projection and only 4% over the prior year. But the bloodletting had only just begun. In 2012 and 2013, year-over-year PC sales decreased by 4% and 10% respectively.

What caused this near-collapse? Sluggish worldwide economies received some of the blame, as did the lack of a compelling technological reason for users to upgrade or buy replacement products. But the real culprit was the tablet. While the PC market was stagnating between 2010 and 2013, tablet sales soared from 17.5 million to 207 million units, a compounded annual growth rate of 225%. And they were doing it by cannibalizing low-end PCs.

Death of the PC

We don’t know who first uttered the phrase “the death of the PC,” but it surely must have happened in 2011 when it became apparent that the threat posed by the tablet was more serious than most had ever imagined. Whoever did it should have copyrighted the remark, for over the next three years it became a headline used by every media outlet that had anything to do with business, investing, or technology.

Of course no one meant that the PC would completely die or that sales would fall to zero. Gamers, content creators, and those pursuing productivity will always comprise a significant market in the computing space… and tablets just don’t provide the processing power and keyboard function that most of these users require. What the death-of-the-PC supposition suggests, rather, is that the PC market will continue to shrink until those who are primarily content users (and therefore don’t need or want all the power and function a PC provides) have abandoned PCs in favor of tablets. At that point, the market will have bottomed, and future growth will be of the modest sort that mature markets experience.

Are We There Yet?

So where is that bottom, and when will it be reached? Until recently, most analysts believed we still had a long way to go. One of those, Merrill Lynch’s Kash Rangan, started with the premise that consumers—as opposed to businesses—purchased approximately half of the PCs sold in 2012. Rangan then estimated that “if roughly 50% of consumer PCs (20-25% of the total market) represent low-end devices which are at risk of cannibalization by tablets, then PC units need to decline by 20-25% (from 2012’s sales of 351 million units) to get to trough growth.”

This gloomy but common view would place the market’s bottom at 263 million units (54 million fewer than 2013’s 316 million), and would probably take another two or three years to play out.

However, it now appears that this is a highly unlikely scenario, because something unexpected just happened. In April 2014, Gartner announced that PC sales for the first quarter 2014 fell only 1.7% from Q1 2013. Then, in July, the research firm reported that after eight consecutive quarters of decline, PC sales were virtually flat in Q2 2014.

Does this mean we’ve hit rock bottom? Gartner analyst Mikako Kitagawa seems to think so: “[W]e increasingly believe markets … have bottomed out as the adjustment to the installed base slows.” Intel CFO Stacy Smith is less equivocal: “PCs have stabilized.”

What’s Driving Demand?

The stiffening of demand for the PC is being driven mainly by two factors. The first is the ending of support by Microsoft for its Windows XP operating system. Microsoft has provided support for the XP system since it was taken out of production in 2008, but that support ended on April 8, 2014. Logically, many users will want to migrate to systems that provide support. And since about one-third of all commercial PCs are running Windows XP, that migration (which is already underway) represents enormous sales potential for PC manufacturers over the next several years.

Second, cannibalization by tablets is certainly slowing, and may for the most part be over. Yes, tablet sales continue to grow at a rapid pace, but it appears that most of that growth is now incremental to the market rather than at the expense of the PC.

Investing Opportunities

After the encouraging news about Q1 2014 PC shipments, the market began to realize that PC-related companies were priced for a much worse scenario than the one that was actually unfolding. Consequently, share prices began to rise. Intel, Microsoft, and Hewlett-Packard, for example, have experienced share price increases of 26%, 11%, and 6% respectively since the Gartner report.

So has the opportunity to play the PC rebound passed by? We don’t think so. Microsoft’s price-to-earnings ratio is 16.8. Intel’s is 18.3. HP’s is 12.3. Not fire-sale valuations, but these are solid companies which pay decent dividends. And if the PC market recovers more quickly than anticipated, these companies could start beating estimates, which would further boost shares.

But we see better opportunities—not only from the PC rebound but in other market trends as well. We’re currently evaluating a list of candidates, with each holding the potential for at least a 30% return over the next 12-24 months. That’s the threshold price performance for all new BIG TECH recommendations. Our final selection will be highlighted in the next issue of BIG TECH, due out August 5.