HP - Evolve or Bust?
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
International Business Machines Corporations, more popularly known as IBM (NYSE: IBM) is set to unveil a new version of its mainframe processor. IBM is the largest player in the mainframe market and its new zEnterprise EC12 mainframe server is what the company is calling its most powerful and technologically advanced ever.
Mainframes were largely used by Governments and corporations but soon sales of these systems used to sift through large volumes of data reduced in the 1990s thanks to the revolution at that point in the Personal Computing space. However, with the birth of e-commerce, corporations soon felt the need for servers that can securely handle large volumes of data, for example, in credit card transactions.
Analysts however are suggesting that IBM will find it difficult to find new customers in this space. Technology research company Gartner predicts that the annual global sales of mainframes will fall this year and each year till 2016. That doesn’t really sound good for a company that says it spent $1 billion developing the same technology. Another factor that doesn’t help them is that the x86 processor, manufactured by the likes of Intel (NASDAQ: INTC) when used in clusters can now perform operations that could earlier only be done by mainframe systems.
The product is set to ship next month and is likely to see high sales initially thanks to pent up demand from existing consumers who are waiting for the latest technology. Nonetheless, analysts predict IBMs earnings growth to continue at a rate of about 10.9%, a much more optimistic outlook than most of them are reserving nowadays for one of IBMs competitors in the mainframes market – Hewlett-Packard.
Of course, Hewlett-Packard (NYSE: HPQ) haven’t unveiled anything in the mainframe space, they certainly have unveiled something in the all in one PC space. Something, well.. maybe I should say somethings, because they’ve unveiled four new all in one PCs two of which (the Envy 20 and Envy 23) are compatible with Windows 8. Both of these models come out in October and offer10 point multi touch technology. Another all in one the Pavilion 20 is also slated for an October release.
However, the biggest (well no, not really considering it is the slimmest) of them all was the SpectreOne, which boasts the Near Field Communication technology. The SpectreOne bears a striking resemblance to the i-Mac, although nobody has said anything about a lawsuit.
HP’s stock was up earlier today, but that’s most likely because of the fact that the tech giant has predicted 2000 more lay offs globally. The shares of the company went up after they revealed the lay off plans in a filing. Most observers feel that this marginal increase is due to investor perception that HP will save more in the longer term thanks to the consolidation of businesses and the fact that more number of people than expected accepted early retirement offers. Regardless, the 1.8% increase wasn’t very noteworthy. This latest news will increase the number of lay offs to 29000 over the next two years.
Some analysts seem to be of the opinion that the HP stock offers good value for the income investor because they recorded a 70% dividend growth rate in the past two years, thus highlighting the company’s focus on returns to shareholders. I see this as a highly optimistic view. I would remain bearish on this stock, as the company’s cash cow is the printer ink business and there’s no reason for anybody to assume that the smartphone owning populace of the world is going to suddenly switch to printing their photos as opposed to viewing it on their phones. One might even go so far as to say Instagram has a part to play in this, but one is definitely being flippant then.
The fact of the matter is that HP seems to have its fingers in too many pies at the moment. It needs to re-structure and place their bets in the right sectors; currently HP seems to be a far cry from the blue chip stock of yore.
ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Intel. Motley Fool newsletter services recommend Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.