Hewlett-Packard (HPQ) is the largest seller of PCs and laptops in the world today. This is the reason why HP stock has been under pressure as PC sales keep declining at an accelerated pace, as customers migrate to smartphones and laptops. I have been positive about the stock mainly due to its low valuation and adverse sentiment against HP. However, the stock has rallied quite a bit since then and the PC industry news has become bleaker. The Wintel empire has been fighting against new technology companies like Apple (AAPL) and Google (GOOG). The fight has not been easy with Intel (INTC) and Microsoft (MSFT) failing to make much headway. However, these companies have formidable resources and I remain optimistic that both will manage to carve out a significant share of the mobile devices market. I have become less optimistic that HP and Dell (DELL) will be able to make a successful transition. Dell has been facing the added problem of three groups fighting for management control. HP also faces serious management challenges with new CEO Meg Whitman trying to understand and direct this enormous company. HP is taking too much time in restructuring and I don't feel too confident about holding HP stock. I would advise investors to sell their HP holdings and look for better technology stories like Nokia (NOK), Intel and Micron Technology (MU).
What is currently wrong with HP
PC sales plummet faster than expected - In the first quarter of 2013, PC and laptop sales were a disaster with HP showing a sharp fall in sales. While Chinese giant Lenovo managed to keep sales flat, HP sales fell by almost 23% as customers migrated to tablets and smartphones. Other PC companies showed big declines but that will be little consolation for HP.
Worldwide PC shipments totaled 76.3 million units in the first quarter of 2013 (1Q13), down -13.9% compared to the same quarter in 2012 and worse than the forecast decline of -7.7%, according to the International Data Corporation (IDC) Worldwide Quarterly PC Tracker. The extent of the year-on-year contraction marked the worst quarter since IDC began tracking the PC market quarterly in 1994. The results also marked the fourth consecutive quarter of year-on-year shipment declines. HP remained the top vendor, but posted a substantial double-digit decline in shipments after an aggressive fourth quarter kept growth flat during the holidays. HP's worldwide shipments fell more than -23% year on year in 1Q13, with significant declines across all regions, as internal restructuring continued to affect commercial sales. Although HP maintained its leadership position in the United States, the company saw U.S. shipments fall -22.9% from a year ago.
Smart Connected Device Market by Product Category, Shipments, Market Share, 2012-1016 (units in millions)
2012 Unit Shipments
2012 Market Share
2017 Unit Shipments*
2017 Market Share*
Source: IDC's Worldwide Smart Connected Device Tracker Forecast Data, February 28, 2013
Mobile Devices transition is missing - Most technology companies are devoting a huge amount of their resources to transition themselves from the PC era to the mobile devices era. The growth in tablets has been stunning to say the least. Intel has positioned itself to capture a huge chunk of the mobile processor market, while MSFT is showing intent through introduction of the smaller 7 inch Surface tablet. MSFT also plans to introduce its new Windows Blue operating system which is rumored to integrate the PC and smartphone operating systems. HP on the other hand seems quite lost. The company has completely messed up its Palm acquisition. HP had a huge opportunity to become a major mobile devices player as Palm had great products and technology. HP accepts that it needs a tablet product but I am yet to see any announcements.
Stock rally has increased valuation - HP stock has climbed by almost 40% to $20.9 since I recommended a buy on the stock. The stock had rallied due to the low valuation and optimism due to the Dell deal. However the stock fell by ~6% after IDC released its PC sales estimates for Q113. The stock is now down almost 15% from the peak value of ~$24 reached during March. The stock is not expensive, with a P/B of 1.8x and P/S of 0.3x. However, given the muted growth prospects, the stock is not very cheap either.
Other issues with HP
1) Top Management has been a Disaster - HP's top management has been a disaster for the company and one of the biggest reasons why the stock has performed so badly over the past few years. First Carly Fiorina made the hugely controversial Company acquisition, and then Mark Hurd was fired over a sexual harassment case, while the next CEO Leo Apotheker was fired for non-performance. The new CEO Meg Whitman (ex-CEO of eBay (EBAY)) has yet to prove herself in the new job. Reports indicate that the top management and the board is a snake pit with the employee morale at an all time low. Meg Whitman in a recent interview has indicated that the company will have to enter the smartphone space again. HP used to be a leader in smartphones during the early part of the decade. But squandered its early mover advantage.
2) Acquisitions have been a Bigger Disaster - In the technology industry, every big company makes numerous acquisitions to keep up with innovation and new trends. HP's acquisitions have not only been hugely expensive (EDS, Autonomy, Compaq), but they have also managed to wipe out most of the value of the acquired company (Compaq, Palm). The $8.8 billion write-down for the Autonomy acquisition reflected badly on HP. This M&A deal will rank amongst the worst technology acquisitions in the history of the technology industry.
Why we like other Wintel companies - Microsoft and Intel
Intel and Microsoft have become very aggressive in the mobile devices market as they realize that will become irrelevant if they just concentrate on the PC and server market. Intel will introduce the "BayTrail" range of 22nm processors for the tablet market in late 2013, which will give it an edge over the current market leader Qualcomm (QCOM). While Windows 8 sales have disappointed, MSFT is set to flood the mobile device market with new products such as Windows Blue, Surface tablets etc. Intel's new Haswell line of chips will also make ultrabooks more competitive than tablets. HP has followed the Wintel lead by introducing new PC/tablet hybrids and ultrabooks. However, I don't think that HP is doing enough. The company management needs to commit itself more towards investing resources into new computing devices. HP also needs to think of breaking up the company, as it seems too bloated and slow. The management was thinking of spinning off the PC business before it abandoned that plan. If the top management shows some fight, then the stock might prove to be a great buy.
Dell - Takeover Fight
Dell has been enmeshed in a takeover fight with different PE groups fighting for control over the company. There is no clarity on who will take the company private, though a floor price of $13.65/share has been set by Silver Lake and Michael Dell. The Dell stock has become a "special situation" play with the stock upside dependent on how the different groups will act.
HP has been badly punished by investors in the last few years due to PC industry problems and monumental management blunders. HP's stock was the worst performing "PC" stock when the IDC data on Q113 PC sales was released. This indicates that the market thinks that HP has the most to lose from the decline of the PC market. HP is trying to reduce its dependence on the PC market by diversifying into software and services. However, its efforts have not gone far enough in my view. HP is a formidable company with a strong presence across major technology segments. But the company management is too slow and bureaucratic. Short seller Kynikos has sold HP to play the declining PC sales theme. I would not go as far as to short HP, considering that the stock is still quite cheap. However, I would look at other substitutes in which to put my HP money, till I see more signs of HP management making the right moves.