HP: Inflection Point?
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It might be one of the most asked questions in all of tech-dom. In the past 10 years HP (NYSE: HPQ) has gone from the face of innovation to the face of mediocrity. Think I’m kidding? Go shop for a laptop seriously and you’ll see that HP has less pricing leverage of their brand than Lenovo, a supposed low-end vendor. HP knife-fights with brands like Acer and Asus to sell commodities in a shrinking market. While Lenovo, running on 2.3% net margins can somehow sell 39% more PCs in the U.S. in 2011 than in 2010 while, spec for spec, their laptops cost $50 more.
What happened to the company that made the RPN scientific and HP-12C financial calculator?
HP’s recent history reads more like an Oliver Stone film of a Robert Altman script than it does the history of one of the world’s biggest multinational companies. Board politics, multiple CEO’s, cost-cutting to the point of mice wandering the halls, and employees being forced to go home at 6 or work in the dark are just some of the things that sucked the life out of the workforce to the point where HP no longer stood for leading the technology curve but rather propping up its over-sized fat tail.
Get Back to the Bench
The numbers for new CEO Meg Whitman are scary. HP is losing market share in the two most important markets in the world, China and India. They have just 5.3% of the Chinese desktop market and have fallen off to 3rd at 12% in the Indian market. Net margins have shrunk to 6.7% and revenue growth is pretty much non-existent. The good numbers for HP is that they have regained the top spot for global PC sales, including tablets, from Apple (NASDAQ: AAPL) in the 1st quarter.
After the recent unpleasantness of HP’s foray into the tablet space that ended before it began, they will be coming back swinging later in 2012 with variations on their tablet/laptop hybrid Elitebooks running Microsoft’s (NASDAQ: MSFT) upcoming Windows 8. For HP, though, this represents an opportunity to start leading the technology curve in the Windows business and home environment. Tablets are becoming a big selling point for business, replacing laptops for those not chained to a desk. Their acquisition of Autonomy, and its meaning-based search technology, will give HP more solutions at the enterprise level. The problem is that the former CEO and board paid too much for it, hampering HP’s ability to shift resources to the needed R&D.
Whitman’s message to her employees has been to simplify and streamline their product line, reducing SKU’s and giving them more leverage in sourcing components in the supply chain, which will give them the cash flow to become the innovators they once were. That is where they can begin to rebuild their numerical superiority while still offering customization while slowly rolling up the brand value ladder.
The Return of AMD
Don’t laugh. Say what you will about another company that has enough skeletons in its closet to fill an encyclopedia, but the AMD (NYSE: AMD) A-series, Llano and now Trinity, processors represent a new opportunity at the low to mid end consumer price point that meshes perfectly with the growing consumer electronics market for the home happening across Southeast Asia, China and India. These are just plain better than Intel’s two-chip solutions.
For HP, they have been in the touchscreen business the longest and have the best large screen technology in the segment. Adding the flexibility of the AMD APUs (CPU and GPU on the same die) and their simplifying product design while still providing 3-d graphics capabilities that are not normally associated with low to mid-price points (think sub $550 for one of these now) to Windows 8’s metro interface and I would be hard-pressed to believe that HP won’t have a serious cash cow on their hands if they execute being able to crowd out competitors like Lenovo and Acer in the supply chain and gain market share based on that alone.
That’s the story behind their Q1 PC sales numbers, streamlining and pricing advantage. Maybe that’s why their laptops are so much cheaper than Lenovo’s. They have their work cut out for them in China. Lenovo has 35% of the market, brand loyalty and local pride on their side. 2013 is shaping up to be a very interesting year for the future of a number of technologies as the lines between the mobile, home and office computers blur.
Rededicating to China
Meg Whitman recently made a trip to China to meet with province party leaders and rebuild relationships that have degraded in the preceding years’ turmoil. Being better at building Ultrabooks will not rebuild HPs brand. HP has successfully outmaneuvered Amazon in Australia’s cloud services market and has just rolled out their full virtual application cloud services network last week. Building devices and solutions at both the developer and end-user that elicit the same reverence with the growing Chinese middle class that the 32S or 12C calculators elicit in scientists and CFAs needs to be their goal and time will tell if they can pull it off. For a company as dysfunctional as HP was, and likely still is, the turnaround will not happen over night.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. 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.