Hewlett-Packard: The Turnaround Strategy Will Sustain Growth In 2014

| About: HP Inc. (HPQ)

Re-entry into smartphone market, another move towards turnaround

Back in 2011, Hewlett-Packard (HPQ) exited the smartphone market after the company failed to sustain the initial momentum, gained after acquiring Palm. But, the company is all set to re-enter this market, announcing two new Slate devices; the first one is the HP Slate 6 VoiceTab, which is a 6-inch phablet, while the HP Slate 7 VoiceTab is more inclined towards the tablet market. These devices are branded "VoiceTab," since they can make phone calls too. Both the devices will be introduced in India first, and with an expected pricing between $200-$250, these devices are positioned to target the low-end mobile device market.

Last year, HP's CEO Meg Whitman revealed HP's ambitions to re-enter the smartphone market, and with these two devices, the company has a chance to regain its shine. Phablets are becoming more popular than tablets in emerging markets, cannibalizing tablet sales. HP currently accounts for one-third of PC sales in India, leading the race against Lenovo (OTCPK:LNVGY) and Dell. Now, with the launch of its phablet in India, the company has a chance to use its brand image to push mobile device sales. However, the company will face tough competition from low priced options available in the market from domestic manufacturers. The smartphone market in India is growing at a robust rate of 229% year over year in the third quarter of last year and the phablet accounts for 23% of the overall market. This provides enough market opportunity for HP to excel with its competitive products.

As a part of HP's restructuring plan, the company recently sold its 1,400 U.S. patents and about 1,000 foreign patents in mobile computing technology to Qualcomm (QCOM). These patents include Palm, Bitfone, and Compaq's IPAQ portable computer. The Palm deal is considered one of three acquisition deals that has haunted HP as it failed to sustain its initial momentum in the mobile device market. All these deals will help HP realign its business towards growth opportunities.

Overall, I believe HP's move to re-enter the smartphone market, with emerging regions as the focus, will provide the required boost to HP's topline. Selling the redundant assets will bring additional resources to target growth areas.

Potential threat to HP from Lenovo's IBM server deal

HP's biggest competitor in PC, Lenovo, recently signed a deal with [[IBM]] in which Lenovo will purchase IBM's low-end x86 server business for $2.3 billion. This is not the first time Lenovo has come to acquisition terms with IBM; in 2005, it acquired IBM's PC business for $1.25 billion. IBM is the third biggest player in the low-end server market, after HP and Dell, with 13% market share in the third quarter of 2013. While, Lenovo, which had low presence in the market earlier, will see its position rise to number three with this deal. This deal is a win-win situation for both parties and provides IBM with an opportunity to focus on profitable growth areas like software and services. After revenue decline of 5% year over year in fiscal year 2013, the company is looking to revive its fortunes in the next fiscal. For Lenovo this deal strengthens its market presence in the server market.

Lenovo's growing presence in the server market is a threat to market leader HP, which had 32.8% market share in the same period, and Dell, which is the second biggest player in the low-end server space. HP lost its No. 1 position in the PC market to Lenovo in the second quarter of last year. The addition of IBM's server line will bring Lenovo to par with other top server manufacturers and thus providing headwind for market leader HP. However, HP has established a strong market footprint and lead over its competitors, thus it will be difficult for Lenovo this time around.


Overall, 2014 will prove to be an inflection point for HP, with the company executing its "Recovery and Expansion" strategy and targeting growth markets. In addition, the company will enter the 3D printing arena this year, and looking at the market opportunity in this market, HP can add significant value to its topline. Looking at the bright growth prospects, I recommend buying this stock.

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.

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