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Hewlett-Packard Is Already at the End of the Tunnel

Riddhi Kharkia

Riddhi Kharkia

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It has been more than 24 months since Meg Whitman officially took charge of an ailing Hewlett Packard (HPQ) after the Autonomy deal debacle that marred the reputation of HP. Whitman charted out a five year long plan for turning around this tech behemoth with the help of innovation, cost control and investing in sustainable products. At halfway of this journey, HP has already started showing signs of sustainable growth as testified by consistent results in the last few quarters and increasing optimism of analysts on the Street.

Battered PC demand is still a worry

The advent of tablets and other smart devices has largely affected the demand for PCs due to which traditional PC makers are experiencing a tough time. Though the decrease in demand for PCs is slowing down yet it will take considerable time to reach a level of stability. Personal systems, which includes PCs and smart devices like tablets and notebooks make up for approximately a third of HP’s total revenue. In the first quarter of 2014, the company saw a growth of 4% y-o-y in revenue from this segment because of strong performance of commercial notebooks.

Additionally, HP introduced a couple of mobile devices to the market in India, HP Slate 6 and Slate 7 VoiceTab. This clearly highlights company’s intention to enter the smartphones market in order to compensate for slow growth in its PC business. India is a huge market for low-cost devices that are heavily loaded with features and these devices from HP score well on these attributes.

The behemoth enters 3D printing

Besides making strides in the smart devices market, HP has also decided to enter the 3D printing market, an industry that is currently in its infancy. One of the favourable points for the company in this regard is its robust distribution network on the basis of which it had entered into an agreement with Stratasys (SSYS), the leader in 3D printing. Though the contract wherein HP was responsible for selling 3D printers manufactured by Stratasys was terminated in late 2012 yet it definitely indicates HP’s forte in selling of printers.

As per estimates, end-user spend on 3D printers jumped 43% to $412 million in 2013 with approximately 79% of that spend coming from enterprises. Gartner has estimated that the 3D printing industry will grow to around $5.7 billion in 2017 from an insignificant $288 million that it achieved in 2012. (These numbers are to give you an idea of the market size that HP is targeting)

HP has been a leader in 2D printing space, a segment that has been a saviour for the company in the last few quarters. Even in the first quarter, the printing business delivered considerable results and while the revenue was down 1% in constant currency, the operating margins were 16.8%, up 0.5 points over the prior year. Though giants like Stratasys and 3D systems (DDD) have gained a strong foothold in this industry yet the expiry of a good number of patents provides a very attractive entry point for HP. If the company can offer printers that are affordable and can resolve the speed and quality issues as announced by Meg Whitman then it has immense potential to gain a dominant position in 3D printing.

Servers is another big focus area

There is little doubt that HP has been able to return to profitability and stable cash flows because of its strict cost control mechanism. On top of that, HP has strategically invested in areas that could offer growth opportunities and one of those is enterprise servers. The recent announcement by IBM to exit x86 server business would benefit HP’s prospects in building its low-end server business. As was mentioned by the management in earnings call, the sale of x86 server business by IBM (IBM) will definitely create some near term opportunities for HP to gain share in server business.

Recently, HP entered into an agreement with Foxconn to build cloud servers which will complement HP’s existing range of ProLiant servers. Already adjudged as a clear leader in private cloud solutions by Forrester Research, HP is all set to leverage its established position in cloud solutions to build its server business in the coming years.

Final Words

The above-mentioned data definitely indicates the fact that HP has regained momentum under the control of Meg Whitman. Fortunately, the slowdown in contraction in PC demand could offer stable growth to HP in that area. In my opinion, the management of HP has understood the areas that need to be leveraged for growth which mainly includes cloud solutions, 3D printing and smart devices. Hence, HP is an ideal investment candidate for fiscal 2014 if you want to achieve higher returns on your portfolio.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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