The erosion of the PC market with the advent of smartphones and tablet devices is a classic example of a brutal wipe-out in recent times. This Zacks report darkens things further as PC shipments are expected to decline around 7-9% in the year 2013. While it would be disheartening for PC vendors to see this data, the more disturbing news would be the shift in preference of the huge Chinese market to tablets and smartphones. Even HP (HPQ) has been a victim of the lagging PC demand as personal systems make up at least one-third of its overall revenues.
HP and its big recovery
Meg Whitman believes that the company is on track with its five-year turnaround plan and it would not take more than the specified time for the recovery. It is true that the PC segment is not performing well for HP but it is important to understand that the particular scenario has affected most of the PC manufacturers and hence, it is not a major point of worry when it comes to analyzing HP. Currently, the company is in a turnaround phase and in my opinion, the best policy during these times is to develop your strengths and focus on their optimization.
Printing and Enterprise convey optimism
One of HP's strong areas is printing and the company did an impressive job in accelerating innovation and growth in this area. Its initiatives like Ink advantage paid off quite well and added to the profitability of its Ink based hardware units. In the coming years, HP should maintain its focus on the printing business and consistently innovate in order to beat the slowdown.
In August, HP's management made some prominent executive changes including the replacement of Dave Donatelli who headed its Enterprise group. Supposedly, Meg Whitman was not quite happy with the execution of plans for the Enterprise group, which saw a decline of 9% y-o-y in revenues for the third quarter. Recently, the company made a leadership change to drive channel sales growth in its enterprise business, a move that highlights company's intent to achieve growth in this segment.
Though execution issues have persisted in HP's enterprise division, a reasonable percentage of the downfall also related to a slowdown in the server market. HP lags behind IBM in terms of share in the overall server markets but the company has managed to maintain its position in the industry due to better innovation and launch of new products like the Moonshot servers. In my opinion, HP's long shot to provide converged infrastructure based on HP intellectual property and software datacenter would provide an optimal platform to the company for driving the enterprise business.
IBM is gearing up
For IBM (IBM), the second quarter of 2013 achieved healthy results because of considerable growth in software and mixed performance in the hardware business. As per reports, IBM is planning an investment of around $1 billion in Linux development over the next five years in order to enable mainframes and servers to handle cloud and big data applications. If IBM can successfully execute these plans, it would provide the hardware giant with a converged infrastructure and allow it to provide holistic support to existing and new clients.
Put some faith in HP
A couple of years back, when Leo Apothekar was replaced by Meg Whitman as the head of HP and spoke of some stern steps in order to execute a turnaround, analysts and investors did not seem quite convinced. However, the fact that HP has come a far way from its weak position cannot be denied. As I mentioned above, the falling PC demand is inevitable and there is nothing much that can be done by company heads to reverse the situation. The impressive thing with HP is that it has more or less understood the dictum and moved on to strengthen other areas.
For HP, the silver lining is its enterprise business as it has a huge scope for growth and the company is heading in the right direction with the intent of establishing a converged infrastructure. Its recently launched Moonshot servers have great potential to become an industry favorite because of their well-designed structure, which allows the clients to buy less hardware and generates a good amount of savings. HP's turnaround story has high hopes hooked on to these servers to boost the growth of the Enterprise group.
Over the last 10 months, HP's share price has climbed approximately 50% and currently trades at a P/E of 1.66, which represents a good bargain. Additionally, as the management pointed out, the company reduced its operating debt in the third quarter by $1.7 billion to $1.2 billion.
It is time to start believing in HP again not only because it has produced some good numbers but more so because the company has now picked up pace in the right direction along with the enthusiastic management support.