Hewlett-Packard: Death Of The PC Could Signal The Dawn Of A New Era

| About: HP Inc. (HPQ)

On June 16, I wrote an article titled Reshuffling My Portfolio to Capitalize in a Down Market”. In that article we discussed Hewlett-Packard (HPQ) and simply asked, “what is wrong with the company?” Then the issue with the company was that it failed to meet Wall Street’s expectations. Like many companies before that committed this heinous crime, it has suffered the consequences. The stock took a beating; one that had continued ever since as investors have bailed on what has been perceived as a lack of direction within the company.

When a company as prolific as HP has been over the years gets a beating to the degree suffered by the stock after already having a relatively unassuming outlook, it causes me to step back and assess not only the state of the market today, but also more specifically the state of HP itself. It is widely understood that HP’s recent declines have been the result of underperformance. But I would like to know: Is this an “over-reaction”?

In the article written on June 16, I didn’t wait for the question to be answered about whether HP’s decline was an over-reaction or not. I thought it was wise to close out my position with the little gains that it had left in my portfolio. To date, there have been half a dozen downgrades on the stock since the middle of May. With continued sluggish PC sales as well as what appears to be a lack of misdirection within the company, I can’t really say that I see value here yet.

Timing the bottom is always a tough thing to do when one tries to avoid catching the proverbial falling knife. But I have to say, until I see clear signs of a turnaround, it should be avoided. Touching HP right now just might require some stitches.

Since recommending HP a short on June 16, the stock has plummeted 32% from a price of $35.09 to where it stands today at $23.60.

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The chart above tells a very compelling story. But not nearly as compelling as what CEO Leo Apotheker revealed during the company’s conference call, suggesting that HP is set to take on a multi-quarter “transformation”, during which the company indicated plans to abandon its PC business. HP also said that it is dropping its long-term earnings goal of $7 per share in profit in 2014.

Apotheker said the company needs to sharpen its focus and its consideration of options for its PC business. This realization came after his first nine months on the job, during which time he “examined each of the company’s businesses in depth” and “carefully considered the path forward.” However, one of the most poignant statements that I read was where the CEO simply offered, “The tablet effect is real and sales of the TouchPad are not meeting our expectations,” Apotheker said.

We see the opportunity for PSG to compete and win in the PC marketplace and our board has authorized to us explore strategic alternatives for PSG. To contemplate the direction is an important component of our strategy to sharpen HP’s focus of clients, solutions and software accessible to any type of device while we continue to expand and leverage our strong technologies including hardware, software and services.

The velocity of change in the personal device marketplace continues to increase as the competitive landscape is growing increasingly more complex especially around the personal computing arena. There’s a clear secular movement in the consumer PC space. The impact of the economy has impacted consumer sales and the tablet effect is real and our TouchPads has not been gaining enough traction in the marketplace. For our PC business to remain the world’s largest personal computing business it needs the flexibility and agility to make decisions best for its user direction. Due to market dynamics, significant competition, and a rapidly changing environment — and this week’s news only reiterates the speed and nature of this change — continuing to execute our current device approach in this marketplace is no longer in the best interest of HP and HP shareholders.

While the market did not take too kindly to HP’s decision, I think the company deserves a lot of credit here for realizing what everyone has already known: The smartphone/tablet market has destroyed PC sales and it will only get worse. Apple’s (AAPL) iPads and Google’s (GOOG) Android platform are now the dominant standards in that arena and it will likely stay that way for the foreseeable future. But considering how Cisco’s (CSCO) restructuring was able to transform the company, HP just might deserve the benefit of the doubt here.

In an article last week, I talked about how Apple forced Google into a panic acquisition of Motorola Mobility (MMI). The main premise of that article discussed Apple’s ecosystem advantage; particularly from the standpoint of a unified system. One of Apple’s advantages has always been its platform unification whereas (until Monday) other manufacturers, as well as Google’s Android, had more of a fragmented platform. Google realized this and thus acquired Motorola Mobility to present its own unified platform of having ownership of both the hardware and software.


In Apotheker’s remarks, he said this:

Due to market dynamics, significant competition, and a rapidly changing environment — and this week’s news.

What did he mean by “this week’s news”? Was he referring to Google’s announcement? My gut tells me yes. If this is the case, then Apple has had a much greater impact on the smartphone/tablet market than previously reported. If HP is serious about being more competitive and returning more value to shareholders, then the company should consider an acquisition that will make it instantly one of the dominant players in the market that it is considering giving up on. HP should acquire Research in Motion (RIMM).

While it is not always easy to admit defeat, there have been many companies, such as IBM, to have embraced the transformation and have been successful at ushering out of the old markets and entering new eras. If HP is able to do this successfully, it should have no problems maintaining its status as one of the most influential tech companies in the world today. I wouldn’t bet against them just yet.

Disclosure: I am long CSCO.