HP Will Tumble On Increased Sector Pressures

Jun.28.12 | About: HP Inc. (HPQ)

With the recent rising trends of tablet computers and highly advanced smartphones, computer hardware and software manufacturers such as Hewlett-Packard (NYSE:HPQ) have had to up their game in order to stay current and relevant. Technology develops so quickly today that it seems the newest devices become outdated in a matter of weeks, only to be outdone and replaced by the latest technological breakthrough. If you take this rapid pace of development within the computer industry, and add to it the increasing consumer demands of high processing speeds, large memory capacity, built-in cameras and the latest operating systems, it's no wonder that the computer market is one of the most dynamic and fierce in the world. So, how is Hewlett-Packard coping under all this pressure? And is that reflected by its stock price?

Currently, HP stock is trading at around $21. Unfortunately, this figure represents quite a rapid fall in share price over the last 12 months, but the price-to-earnings ratio follows the signature trend of technology stock: nice and low at 8.07. Other companies, such as IBM (NYSE:IBM) have also enjoyed buoyant price-to-earnings performance, with the current ratio of 14.9 just above its five-year average. So, what is HP doing, or perhaps failing to do, that its competitors are succeeding at?

Actually, HP has been making headlines recently for all the right reasons, which makes its stock price decrease even more surprising. HP's groundbreaking computer, the HP Z1 Workstation, recently went on global sale after its popularity in the USA and strong reviews from critics. HP was praised for the design of the desktop computer, which is unconventionally bulky in a world where, when it comes to computers, the smaller is usually the better. HP's unique computer features a monitor which opens up to reveal disk drives and USB ports. The computer is priced at around $2,000 and was designed for professional use, and so far it has been an overwhelming success. This move also reinforced HP's role as a business and professional technology provider, as well as personal-use technology provider, within the public consciousness.

Additionally, HP has recently made moves to broaden its scope of services by confirming that it will further develop its own cloud networking service, similar to those currently offered by Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). The cloud computing service, known formally as CloudSystem and discussed extensively during the HP Discover conference in Las Vegas, means that HP finally has the chance to become an established member of the cloud computing market. HP will also offer a cloud computing management service, which will allow the users of cloud computing to oversee and manipulate their clouds, whether or not they use CloudSystem. Again, this move is a positive one, emphasizing that HP is still concerned with keeping up with the competition and offering its consumers the latest software. Amazon seems to be dragging its heels in some markets, with the beta release of HP Cloud Services coming way ahead of the rumored online giant's entry into Australia. The company launched a $200 million data center in New South Wales, meaning that shareholders are pinning their hopes on extensive growth in Oceania to boost share prices and value.

Furthermore, HP's global success has recently been confirmed with its recent positioning in the technology league tables in India. HP was ranked number one in a league table of trustworthy technology companies compiled by the Trust Research Advisory, a position which it also held the year before. Not only that, but HP was ranked as the 22nd most trustworthy brand in India, placing it significantly above competitors like Apple. Such a prestigious award highlights the fact that HP has not only proven to be successful in the USA and Europe, but that its reach stretches much further than that.

Unfortunately, not all of HP's recent activity has been so positive. Conflicting with HP's position as a trustworthy company are recent reports that the company may have been involved in a conspiracy to fix the prices of certain technological devices. A number of HP's offices have been raided, and inquiry by the Korea Fair Trade Commission is now underway into whether HP was colluding with other technological manufacturers and distributors in order to fix prices. However, HP has stated that it will co-operate fully with the investigation, and all it can do now is wait patiently for the inquiry to come to an end, and plan carefully for whatever outcome it brings. There seems to be a lot of price fixing lawsuits going around in technology and publishing circles, and Apple is one of six companies facing allegations of fixing the price of eBooks. One company is HarperCollins, a subsidiary of News Corporation (NASDAQ:NWS), which is already trying to prevent damaging revelations of phone hacking from crossing over from the UK, where Murdoch's reputation is severely tainted.

It seems very unfortunate that HP's stock prices are falling despite the company's positive developments and technological success. HP is obviously trying to demonstrate that it's still a competitor within the technology market, as seen with its long-awaited move into the cloud computing market. However, I would suggest that HP's most recent developments have perhaps been too specialized, too targeted for specific markets. For example, its Z1 Workstation is doubtless an incredible creation, but as it was designed and marketed solely for professionals, it will be irrelevant to the majority of technology consumers. I would recommend that HP come up with a device with will be useful and desirable to both professionals and the general public. There are lots of these devices to take inspiration from, such as Apple's iPad, which can be used in both a personal and a business environment. If HP can come up with something which is successful in general release, and not just in a niche market, it may see its share price begin to rise once again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.