Here’s How Hewlett-Packard Can Become a Major Player in the Tablet Industry

By Meena Krishnamsetty - September 21, 2012 | Tickers: AAPL, DELL, GOOG, HPQ, MSFT | 0 Comments

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In order for Hewlett-Packard (NYSE: HPQ) to be a force in the brutally competitive horizontal computer industry, the company must adapt to industry wide changes. While the likes of Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) have been the first movers into the mobile and tablet industries, computer companies like Hewlett-Packard are beginning to show up on the scene late.

At first glance, it’s obvious that the combination of phones, tablets, increased competition, and poor economic conditions are affecting PC sales. The industry’s transition from PCs, to tablets and smartphones has had a major affect on PC companies (Click here to see a sales breakdown of PCs, Smartphones, and Tablets). Even though tablets and smartphones have had an impact on PC sales, we believe that PCs are not going anywhere anytime soon. They are more efficient to use for business purposes and allow customers to have more screen space at their fingertips. Looking at PC market share, we see that HP still ranks among the best in the business at number two, behind only Apple.

In the technology sector, time is often a company’s largest advantage over competitors. Failing to grab swift hold of the technological and fundamental changes that are taking place has already beaten down Hewlett’s stock price and earnings. HP can make up for their lost time with a successful products launch in the niche business class market. If they can penetrate this market as planned, they would be the first company in, and would gain a timely advantage over their competitors. In the fast-paced tech sector, this is one of the best methods to gain market share.

Tablet sales are expected to total $29.1 billion in 2012, an 83% increase from 2011.  According to ABI research, more than 22% of companies in the US already deploy tablets, and enterprise tablet adoption is estimated to grow by almost 50% per year. Hewlett Packard plans to take advantage of this growing market by designing a tablet for businesses.  Most tablets that have been said to be made for enterprises seem more like they are made for consumers. Tablets offer businesses simple and functional designs to manage workflow. To perform a task on a laptop or desktop you have to boot up a program and wait; on a tablet, though, the task can be easily achieved on the go by jumping into an app. It’s important for businesses to stay on top of evolving mobile technology, and Hewlett-Packard seems to have set their targets on a market where there’s room for others to find success.

PC sales for Hewlett decreased 3% from 2010 to 2011, and are down 8% for the nine months ended July 31, 2012.  If PC sales continue to decline at 8% in 2013, Hewlett’s new tablet will have to get roughly 8% of total tablet sales (assuming $40.7 billion in 2013 tablet sales), or revenues of $2.9 billion, to make up for their declining PC sales. Assuming an 8% decline in PC sales for Hewlett and only a 40% increase in total tablet sales in 2013 is a relatively pessimistic forecast. Most analysts agree that there is still a place in homes and businesses for PC’s, and demand cannot continue to decrease at an 8% rate for long. A 40% increase in tablets is also on the low side. With vast room for expansion on the enterprise side, many analysts believe the market will grow between 50-70%.  Overall, the conservative numbers seem to show that with a business oriented tablet, Hewlett-Packard should be able to make up for lost PC sales with relative ease.

Consequently, Hewlett-Packard is planning to release the Envy x2, a hybrid between a laptop and a tablet, by the end of the year. The Envy x2 comes with a fully detachable keyboard, a trackpad, and has a touch screen that is roughly the size of the iPad. HP did not disclose the product’s price points in their entirety, but did state the most expensive model will cost about $1,400.

To excel in the business class niche, HP has to develop a product that gives business professionals an advantage over using Apple’s iPad and the Amazon.com, Inc (AMZN) Kindle. Todd Bradley, executive vice president of HP’s Printing and Personal Systems Group, said that the company’s new business-class tablet will give users the ability to utilize features for vertically-managed operations, as well as the option to service the tablet itself.

HP’s Printing and Personal Systems Group is planning a 20-city U.S. road show starting next month, inviting their customers and partners to see first-hand the benefits of the tablet and HP’s full PPS product portfolio. HP has a wide audience with over 1,100 channel partners, and with a good business product, we may see the company’s stock price regain at least a fraction of its early-2000s highs.

To get a better stance on how Hewlett-Packard fares among their peers, I compared them to PC and tablet makers.  From a valuation standpoint, HPQ has a lower P/S than Apple, Microsoft (NASDAQ: MSFT), Google, and Dell Inc. (NASDAQ: DELL), while sporting an EV/EBITDA ratio that is below each competitor excluding Dell. 

In the last five years, Hewlett-Packard hasn’t grown revenues as fast as Microsoft, Google, and Apple, but they have expanded their top line substantially faster than Dell. Looking at ROA and ROE, Hewlett-Packard ranks in the bottom half in both categories, only having a better ROA than Microsoft, and the worst ROE. Hewlett-Packard only trails Apple and Google in terms of operating margins, but trails Dell, Google, and Apple in terms of profit margins. HP is cheap relative to their comparables, but they haven’t performed as well as their peers.  In terms of revenue growth, returns on assets and equity, and operating and profit margins, Hewlett-Packard ranks in the bottom half in nearly every category. 

In the hedge fund industry, though, the sentiment surrounding Hewlett-Packard is predominantly bearish. Hedge fund manager Philippe Laffont, and infamous short seller Jim Chanos have criticized HP in the past for its strategic flounderings, and David Einhorn believes that computer companies like Dell and HP have the earnings valuations typical of collapsing businesses. Although established hedge fund managers in the industry don’t like HP, if investors are overlooking one of history’s most resilient tech companies, there may be a buying opportunity. If HP can fill an unmet need for tablets and laptops in the business niche, it can continue to be a major player in the tech sector.

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