Watching the collapse of Hewlett-Packard (HPQ) stock last week, I couldn't help but feel that the story seemed familiar. A once-proud tech titan, seeing its share price halved amidst questionable decisions, declining market share, and a seeming lack of focus.
Over the weekend it hit me: HP is the new Research in Motion (RIMM). Let's look at the similarities:
1. Questionable leadership. RIMM's co-CEO's Jim Balsillie and Mike Lazaridis have been repeatedly criticized over the past few years, even in public by anonymous senior executives. HP's Leo Apotheker, on the job for less than a year, has faced similarly negative reviews. Apotheker's predecessor Mark Hurd had resigned amid allegations of an affair with a softcore porn actress. In 2006, at the beginning of Hurd's tenure, HP chairwoman Patricia Dunn resigned after reports that HP-hired investigators surveilled a fellow director and harrassed journalists in attempting to trace leaks coming from the HP board. (What the heck are the board members of these companies doing, exactly?)
2. Lack of product focus. HP executed a bitterly fought $25 billion merger with Compaq Computer in 2001; a decade later, the company plans to spin off and sell its personal computing business. HP bought Palm for $1.2 billion in early 2010, and announced plans to bring Palm's WebOS operating system to smartphones and tablets, to compete directly with Apple (AAPL). The company launched a webOS-based TouchPad tablet on July 1st of this year, then killed it less than two months later. Amidst the news of killing WebOS and exiting the PC business, HP announced a $10.5 billion purchase of British software firm Autonomy. The company now claims to be focused on software and cloud computing, which, given its history, means by 2012 the company may be concentrating its efforts on Chinese aquaculture.
RIM, meanwhile, similarly failed in its attempt to compete with the iPad. Once a smartphone leader, it has fallen behind in features and ease of use. RIM's own vaunted software, QNX, has been delayed repeatedly, while Android and the iPhone eat away at market share. RIM's most recent answer to the lack of interest in its smartphones is to create a streaming music service on top of its Blackberry Messenger platform. This will no doubt excite consumers, who are probably sick and tired of having to choose from one of the at least nine different options for the same service that have long been available on the iPhone and Android devices.
3. "Value play" momentum at the bottom. After missing earnings in late June, RIMM rebounded after Bloomberg reported the rumors of takeover attempts for the now-devalued company. On Monday, HPQ rebounded 3.6% after Bloomberg reported the rumors of takeover attempts for the now-devalued company.
Indeed, take a look at the charts for the two companies, and see the parallels of HPQ, only lagging RIMM by two months:
[Click to enlarge]
The highlighted areas show a small bounce immediately following the worst of the news (earnings from RIMM, divestiture and acquisition for HP). Of course, such a bounce is likely to occur when the massive stock hits make such pretty fundamental numbers:
|Fundamental Ratios for HPQ and RIMM, August 22, 2011|
Despite the gaudy fundamentals, HPQ is a value trap right now (as I argued RIMM was back in June, though RIMM has held up well through the downturn.) In fact, I would argue that RIMM in June was a far better (or perhaps less worse) buy than HPQ is now, given RIMM's stronger balance sheet and overseas strength.
I simply would not recommend a purchase of HP stock right now. Much like RIMM post-June 16, as the company fades from the news, we can expect the "dead cat bounce" to drift away along with buyers of the stock. Tomorrow we will take a look at option strategies traders can use to play RIMM and HPQ if our thesis is correct.