Where Is HP Heading?

| About: HP Inc. (HPQ)

By Cagdas Ozcan

Hewlett-Packard Company (NYSE:HPQ) was downbeat for the most part of fiscal 2012. Finally, in the last quarter, the shares began to correct and started to ascend. For fiscal 2013, HP maintained the optimistic atmosphere and continued its winning streak on the trading floor.

Until recently, poor industry performance and a not so encouraging outlook for the PC market put pressures on HPQ. When the IDC made a press release about declining PC shipment worldwide, no one was spared from the fall. Not even the industry leader HP was exempted from the slump of PC stocks.

PC Shipments Worldwide

Hewlett-Packard remained the worldwide industry leader in the PC industry. It is holding on to a market share of 15.7% as of the first quarter of 2013. However, its market dominance is slowly diminishing. It lost 2% of the share, probably to Lenovo, compared to its year-ago 1st quarter market share of 17.7%.

Lenovo (OTCPK:LNVGY) holds the second spot and is trailing close behind HP with a market share of 15.3%. Among the top 5 PC vendors, Lenovo is the only company with increasing market share. It notably improved from 13.2% in the 1st quarter of 2012. The rest of the top 5 leading PC brands are Dell (NASDAQ:DELL), Acer and Asus. They are holding on to a 1st quarter 2013 global market share of 11.8%, 8.1%, and 5.7%, respectively.

PC shipment during the first quarter significantly declined among these companies except Lenovo. It sold 11,705 million units in the first quarter of 2013. But this is somewhat similar to the number of units it sold during the same period a year ago.

HP, on the other hand, was among the hardest hit with a -23.7% growth rate. It only sold 11.997 million units compared to the 15.726 million units it shipped in 2012. The hardest hit is Acer, down by 31.3% from 8.952 million units to 6.150 million units. ASUS also saw a decline in PC shipment from 5.401 million to only 4.363 million units. This is equivalent to a negative growth of 19.2%.

The global PC market including other brands had a negative growth of 13.9%. PC shipment worldwide weakened from 88.635 million to only 76.294 million units in the first quarter of 2013. While IDC previously projected a decline in PC sales, the above rate came as a surprise. It only expected a decline of 7.7%.

Accordingly, the last quarter market contraction of the PC market is the worst since 1994. Many analysts point their fingers to the increasing popularity of alternative devices like iPad and Smartphone. Many of these mobile wireless gadgets can already perform most of the functions of personal computers. Although the PC still dominantly leads in terms of power and memory, more people prefer these alternative devices.

HP's Declining Market Share

While there are many factors that contributed to the significant market share loss of HP, internal restructuring affected its sales. However, once the system is properly in place and the company changes its strategies, HP will maintain its market dominance. Otherwise, it is highly probable that Lenovo will take over the market leadership sooner than expected.

Lenovo fell short by only 297,001 units to overtake HP. So there is greater chance that the next quarter results will show Lenovo already leading the pack. If this happens, this will cause another major blow to HPQ's shares.

But I don't think Meg Whitman, president and CEO of HP, will give the throne that easily to Lenovo. It will definitely fight back to maintain its dominant hold of the market. But still, that remains to be seen and the results will show up in the next IDC quarterly report.

Sales and Net Income

Declining PC shipment will also reflect weaker financials. HP's total revenue weakened by 5.41%; from $127.245 billion in 2011 to $120.357 billion in 2012. This is even lower than the revenue it generated in 2010 at $126.033 billion.

For the first time in 3 years, HP incurred a net loss. It reported a net loss in 2012 at $12.65 billion. This is a disappointing performance compared to the net income of $7.074 billion in 2011. It also generated net income in 2010 at $8.761 billion.

But despite the declining revenue and the net loss, HP is still a strong company with a market capitalization of $38.41 billion. This is way above the industry market capitalization of $770 million. However, its strong competitor, IBM, is still the biggest in terms of market cap with $209 billion. But HP is bigger than Dell, whose market cap is only $23 billion.

In terms of revenue, HP dominates above all being an industry leader. IBM only generated revenue of $103.24 billion, while Dell has $56.94 billion in revenue. But on the negative side, only HP incurred net loss in 2012 while Dell and IBM reported positive numbers.


In the midst of a contracting PC market, HP faces the challenge of declining PC shipments worldwide. On top of that, it is holding on to its market leadership while facing rising pressure from Lenovo. In order to survive, it has to deal with the increasing migration of consumers from PC to alternative wireless devices. Apple's (NASDAQ:AAPL) iPad and Samsung's (OTC:SSNLF) Android-powered devices are grabbing more people away from personal computers. In order to slow down the migration, it has to come up with more exciting PC features.

However, this is an industry-wide problem and HP is not the only one facing the issue. Even Apple is facing the same problem with its Macbook. The touch-screen feature and the launch of Windows 8 were projected to boost PC sales last year. But they did not create much impact on the consumers.

Nonetheless, PC shipments may still face declining figures in the next few months but they will eventually stabilize. No matter how popular the smartphones and the iPads are, the PC market will continue to exist. It will remain a core component in businesses and in some people's personal lives. It is just a matter of proper positioning to the right market and to the right people.

When it comes to personal computers, HP is at the forefront of the industry. Hopefully, it will continue to do so not just as a major player, but as a market leader.

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

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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