Why HP Will Survive the “Death” of the PC
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While it is hard not to join the angry masses, grab a torch or a pitchfork and march on the headquarters of Meg Whitman and her monster – the once-venerable Hewlett-Packard Company (NYSE: HPQ) – we have all seen that movie and know how it ends. This analogy of course begs the question of whether the company’s $8 billion goodwill impairment charge has condemned it to die misunderstood, or if salvation may still be achieved. Ultimately, despite the very significant missteps that HP has made, if Ms. Whitman is as savvy as her board hopes, there may still be hope for this beleaguered icon.
Oops And/ Or My Bad
Despite an explicit warning from HP that the numbers would be exactly as bad as they were, last Thursday’s trading session saw investors punish the stock to the tune of 8.15%. To review, $8 billion of the company’s $8.9 billion loss is attributable to a goodwill writedown related to the company’s ill-fated purchase of enterprise IT service provider Electronic Data Services (EDS). HP also has a billion-plus dollar write down from its acquisition of Palm, Inc. to its credit and comparisons are being made to Microsoft Corp.’s (NASDAQ: MSFT) $6.2 billion gaff with online advertiser aQuantive. The parallel is a good one, but not for the reasons one might think – see below.
If one is to be fair, and since we’re only talking about billions of dollars, Ms. Whitman was not at the helm when most of these bad choices were made and she has been very candid about what to expect, even precise in estimating the bad news. HP has been one of the beacons of innovation since its founding over fifty years ago. For a technology company to survive for that long, it must make mistakes, learn from them and quickly move on. The current “transition” period is a test of whether HP has another self-reinvention left.
Does Death Truly Cometh?
One of the stark realities of HP’s numbers is that the most significant decline in revenue came from the segment that includes the company’s core-PC business. Of even greater concern is the fact that the decline bumped that segment out of the top spot for revenue generation; the service segment is now the highest revenue producing part of the company. The decline is not specific to HP either; Dell Inc. (NASDAQ: DELL) has faced similar declines in sales. One reason Dell has seemed to suffer less is that it has remained focused on its core business and obtained a strong foothold with students. Dell turned to cheap and easy customization options to differentiate itself and has been successful.
So, given the demonstrable decline in PC sales, is the era of the PC really at an end? The answer is mixed. While on the one hand, tablets have made a significant dent in how users access the internet, existing models are not real replacements for full-function PCs. Apple’s (NASDAQ: AAPL) iPad seemingly has defined a new generation in computing, but papers, spreadsheets and reports are not created on an iPad. Similarly, Google’s (NASDAQ: GOOG) tablet, the Nexus 7, is not a productivity device either. The device’s slogan is “The Playground is Open.” Not the stuff that major corporations are arming their professionals with. In fact, society seems to be facing an updated version on Newton Minow’s The Vast Wasteland; the original reference referred to television, but the idea of content without substance may be even more prevalent online. Computing seems to be changing to its very core, but it is about consumerism, not production and creativity.
So This Helps HP How?
In late October, Microsoft is set to unveil both its Windows 8 operating system and its Surface tablet. Unlike existing tablets, the Surface is supposedly going to have the capability to run the full version of Microsoft’s Office Suite and truly possess the functionality of a notebook. While Microsoft has been largely responsible for the production of the device internally, there should be plenty of room in the market for HP to create a notebook/ tablet hybrid like the Surface. Take for example the Google Nexus 7 and the Samsung Galaxy 10.1 with runs on Google’s Android operating system; these two devices have been able to share the spotlight with plenty of consumer dollars to share between them. Outside of the world of Apple, the market seems happy to accept various similar, yet competing devices. While Dell and others may take this same approach, particularly if the Surface is met with any real enthusiasm, there should be plenty of growth available to go around. Either way, such a development could harken in a new era of competition between the PC juggernauts, and maybe even a return to productivity.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple and Google. 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.
