Investors surely notice the many different lines of businesses Hewlett-Packard (NYSE:HPQ) has managed to get into over the years beyond its original PC operations. Today, H-P has combined annual sales of over $100 billion, nearly three times that of Cisco Systems (NASDAQ:CSCO) and close to 20 percent more than that for IBM (NYSE:IBM), two notable enterprise-IT companies that H-P, a leading PC maker, now also competes against. Yet, issues of low margins and lacking profitability have persisted at H-P, overshadowing its impressive sales size. The company has seen the erosion of its shareholders' equity at an increased rate each year since at least 2010. With a sprawling product mix that doesn't share a common platform, it's difficult for H-P to execute a turnaround both at the corporate and division levels, despite having some superior individual technologies.
Investors likely understand and appreciate why H-P has turned a lot of its attention to the enterprise-computing business. But running enterprise-IT services alongside PC making doesn't seem to be a synergistic strategy. Taking a similar approach, Dell (NASDAQ:DELL) hasn't had much success with its dual business pursuit. When IBM, still a well-run company today, decided to transform itself to an enterprise-IT provider, it didn't attempt at keeping a separate PC operation and eventually sold its PC unit to the then-rising PC maker Lenovo.
In today's personal-computing environment, H-P doesn't have to shed its PC-making business altogether, but may consider spinning it off to give the PC business some devoted and yet deserved attention. Due to ongoing radical innovations in the field of personal computing, future PCs can no longer be a commodified design, unlike in the IBM days when the PC could bring in constant cash flows with high volumes and predictable margins. To prevent PC from becoming increasingly less relevant, H-P, and other PC makers, must spend some serious R&D money on redefining and developing a new version of the PC.
Although the PC as we know it is in decline because of the increased use of simpler mobile-computing devices by average consumers, a next-generation PC could take root over time if PC companies could find ways to incorporate the increasingly popular cloud-computing platform to make the future PC lighter and faster by moving previously PC-installed software over to the cloud for on-demand access. But it may be difficult for H-P to contemplate such changes while running its PC business in the shadow of all the other much-favored enterprise-IT units.
Despite all the pessimism about the PC business, it seems still a worthy proposition that H-P try to define a new PC concept, allowing the creation of a future PC, agile yet still powerful enough to handle more complex computing tasks that today's mobile devices are not designed to do. It'd be a mistake to give up on the PC business, and companies like H-P that have much at stake in the PC business should find ways to tailor to tomorrow's more sophisticated PC users in a potentially premium market whereby not everyone may need a full-fledged PC.
The Surface tablet by Microsoft (NASDAQ:MSFT) is only an early experiment and also proves how challenging it can be to balance mobility and computing power, something the future PC must fully address. What Microsoft did with the Surface was to add a traditional PC element to a mobile device. Inherently less powerful as a mobile device, the Surface can sometimes freeze up when carrying out routine computing tasks like saving a file. Such a performance flaw defies the whole purpose of making the PC comparably convenient to a typical mobile device.
Unlike Microsoft whose Windows operating system ties together a lot of the company's offerings from both the PC side and the increasingly important corporate-service segment, H-P doesn't have a common platform that can encompass its numerous products and services. Besides the personal-computing business at H-P now counts just nine percent of the company's operating profit but nonetheless casts a large cloud on the company's overall performance because of declining PC sales. Therefore, it makes sense to separate PC from its enterprise-IT that's on a different pace for growth.
Having worked on building its enterprise-IT products and services for quite some time, H-P has developed some strong enterprise-computing technologies such as its converged infrastructure that integrates servers, storage and networking to achieve better-managed datacenter infrastructure for corporate clients. Many of H-P's corporate software offerings have also seen substantial growth - for example, its big data analytics Vertica and even the e-mail management application Autonomy, which the company obtained in a much-criticized acquisition.
A breakup of the declining personal-computing business from its growing enterprise-IT operations could thus potentially unlock some of the value now buried within the combined company. With its shares currently trading at a price level that's only about one-third of its sales on a per-share basis, H-P could fetch a higher valuation for the enterprise side of its business after a breakup. Meanwhile, its personal-computing business could also fare better by operating under a clearer direction and with appropriately allocated resources. A breakup can only help H-P's turnaround whereby the company has a chance to reinvent its PC business to account for today's drastically different personal-computing environment, as well as taking full advantage of the growing enterprise-computing market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.