HP: Don't Sell This Stock

| About: HP Inc. (HPQ)

Hewlett-Packard (NYSE:HPQ) unveiled its Windows 8-based touchscreen PCs recently. The Envy 23 and 20 TouchSmart PCs come with 23 and 20 inch displays. The devices also feature industry standard specifications such as solid-state drives, 3TB storage, Beats Audio and HP TrueVision HD Web cams. There is nothing redeeming about the newly announced PCs, but they still deserve a mention before understanding HP's position in the PC market.

Less than a decade ago, HP and Dell (NASDAQ:DELL) ruled the consumer computing market, and if someone had to buy a PC, they used to choose between the two. Dell was popular with those who looked for sturdy machines and HP was preferred by those who liked their computers and laptops to be stylish. Fast forward to 2012. The PC market has fallen drastically and manufacturers are struggling to stay relevant in a market that is dominated by smartphones and tablets. Trouble began when Apple (NASDAQ:AAPL) announced its iPhone in January 2007.

But, the death knell to PC manufacturers struck when Apple announced its iPad, a tablet computer. Soon after iPad was announced, manufacturers like Samsung, Sony (NYSE:SNE) and others began to use Android to run their own tablets. At the moment, most people prefer using tablets because of their portability and convenience. Thus, companies like HP have struggled to find ways to sustain interest of consumers and investors alike. Both Dell and HP have reported losses and both the companies have found it difficult to innovate. HP is going to launch a tablet that is specifically aimed at the enterprise market and has categorically declined to manufacture tablets for consumers. I admire the stance they have taken, though it is hurting them. HP has insisted that it does not want to be a 'me too' manufacturer, and compete with Apple's iPad.

HP President and CEO, Meg Whitman knows that she has to compete not only with Apple but also with IBM (NYSE:IBM), Google (NASDAQ:GOOG) and Samsung, all of which have remained popular not only with consumers but also with enterprises. Much as I would like to support her, I can't help but notice that launching a tablet or two and trying to stay clear out of Apple's path is not going to help HP. HP needs to innovate and that innovation needs to be particularly drastic, to the point of bringing an entirely new platform or product that the market has never seen before. HP has had its share of woes and the demise of Web OS and Palm smartphones was yet another shocker to the ink and cartridge manufacturing company. Even to this day, HP remains the No. 1 company in the world when it comes to PCs. But, Lenovo Group Ltd. has almost caught up with HP, thanks to its cheaper and more diverse range of products.

At the moment, HP needs to do a lot of soul searching, and that includes getting designers to work several extra hours each week and innovate until something significant comes out of boardrooms. Unless that happens, I do not expect HP to have a successful year ahead in 2013. Apple's iPad mini will take on not only smaller tablets manufactured by Samsung and others but will essentially encourage many more PC users to jump over to the tablet bandwagon. HP not only has to work with Microsoft (NASDAQ:MSFT) and make sure that there is a better PC out there in the market that runs on Windows 8, but it must also consider alternate sources of revenue.

Some of the options that HP has in its hands are innovating existing PCs (both desktops and laptops), innovations in designing, alternative operating systems and developing completely new products. HP might also want to explore cloud computing opportunities and divest its low performing laptops and desktops. I believe HP can take an example from Apple and choose to have very few but excellent products in the market. Both HP and Dell have umpteen numbers of laptops and desktops with various versions and if you asked me, I would not be able to tell the difference between any of the models. It will also help the company to name the models in a manner that makes it easy for people to remember them, instead of having random alphabets and numbers joined together.

No matter how popular tablet computers are, most of us who are power users of computers prefer a desktop or a laptop to work on. Most people prefer using PCs when it comes to doing 'serious work' and that is where opportunities lie for HP and possibly for Dell as well. If HP scraps all the unnecessary models that it currently has in its catalog and uses Microsoft's Windows 8 on just a few machines that are incredibly innovative and intuitive, I am sure it can give its competitors a run for their money.

At $17.43, HP's net loss stood at a dismal $8.85 billion. This translates to a loss of $4.49 per share. Its revenue has fallen down to $29.7 billion from $31.19 billion just a year ago. The company has a negative Return on Equity, at -15.60%, which may make many investors skeptical. Moreover, HP's profit margin is -4.54, which again is disappointing. The company has a Total Debt of 29.7 billion and an Operating Cash Flow of $8.91 billion. The numbers are not encouraging, but I still see a hope for HP investors as the company is trying to launch new products. We must remember that HP is still the most successful PC manufacturing company out there, and if it makes sure that it gets the game right by offering top-notch products that rival existing competitors, it will bounce back.

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.