Will HP's New Move Work?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Though perhaps stating the obvious, it is official; Hewlett-Packard (NYSE: HPQ) is now focusing on tablets.
According to a statement given by HP CEO Meg Whitman, "We're shifting resources from PCs to tablets." She made the statement this week during the Morgan Stanley Technology, Media & Telecom Conference.
From the beginning
HP started in a one car garage as the brainchild of William Hewlett and Dave Packard. Through solid leadership and focus, the company saw steady growth throughout the 80’s and 90’s, specializing in data storage, networking hardware, as well as software services, its products are found in households, small- to medium-sized businesses and large corporations. In 1999, the company spun off a segment of its business as Agilent Technologies which is now valued at twice HP stock – about $40 per share.
In 2002, it merged with Compaq and in a short seven years, HP had reached the ranking of number 9 in the Fortune 500. It seemed not to be the product, or even the business model, which led to the hit HP has taken in recent years, but leadership. Starting in 2010, HP lost one CEO over sexual harassment allegation, an interim that couldn’t make the big decisions, and one that made the big decisions, just the wrong ones.
Leo Apotheker is credited with the company’s loss of over $30 billion in market capitalization. How did he accomplish this? By changing focus.
Apotheker’s first order of business was to wildly shift the focus of the company from producing computers and invest in higher margin industries. He also cut the promising investment the company had made into the smartphone and tablet computing world when it purchased Palm earlier that year. Finally, he made the decision to spin off the personal computing division into its own company. This last move was quickly reversed, as it was strongly argued that this division of the company was too integrated and critical to business operations.
Although HP had already been a manufacturer of PDAs and netbooks, the original intent was to be a more powerful force in the context of mobile computing. As its competitor Apple already had a stranglehold on the market with the iPad, the acquisition of mobile device vendor Palm could have been a legitimate platform for a mobile strategy. In my opinion, the program was axed too quickly before gains could be realized.
Intentions were clear; Apotheker saw the slow decline of PC sales and was attempting to ‘right the ship.’ However, his decisions made clear that he didn’t understand the cause. It was not use that was declining – it was restriction. Consumers no longer wanted to be tethered to a large workstation or desktop in order to access anything. They wanted it on the go. Clearly a mobile move would have been beneficial for the company.
The model Apotheker attempted to follow was competitor, Internatinal Business Machines (NYSE: IBM). Without argument, it is a successful model – but for reasons that HP could not capitalize on in an effective way. IBM emphasizes innovation in order to differentiate its products while HP uses strategic acquisitions to gain market position. IBM has a diversified global reach, with different products servicing different geographic areas. HP had focused on its narrow product line servicing every area.
But what Apotheker saw that caught his attention and prompted the “get out of PC’s now” decision, was IBM’s business server software solutions. As of December 2012, IBM had a services backlog of $141 billion, a strong position in the emerging e-business services. Today, the company has a market cap of $225.5 billion and is part of the technology sector and computer hardware industry. Shares are up 5.6% year to date as of Thursday's close and the stock's dividend yield sits at 1.7% - all reasons that keep IBM as a ‘buy’ in several analysts book.
Investors reacted to the appointment and succeeding decisions, and the company’s stock plummeted. In fact, during Apotheker's tenure at HP the stock dropped about 40%, 25% of which happened on the very announcement of Apotheker’s ideas.
In 2011, Meg Whitman took the helm and began putting things right. In the last two years, Whitman has reorganized the HP model to look more like Dell (NASDAQ: DELL), focusing more of its energy on sales to businesses. Currently, Dell is going through an uncertain stock movement since CEO Michael Dell announced a stock buyout in January, a move that has most waiting to see where the chips fall before making a move on.
Whitman also stepped up its innovation. HP recently unveiled its new 27 inch All-in-One tower-less workstation: the HP Z1. With assistance from new partner NVIDIA, which supplies the Quadro graphics card, boasting support for more than 1 billion colors, this system will set the new standard for power and convenience in personal computers and tablets.
The new path
This move, from PC’s to tablets, is already in the works. Whitman is not stating anything new, merely affirming what everyone knows and has wanted them to do. Tablets are quickly becoming the most powerful and versatile computing gadgets, in addition to already being the most convenient.
Tablets allow the user to do more than mobile devices simply due to screen size. They also have, on average, longer battery life and can have better adapter ports for power and connectivity. Let’s not forget he content creation apps that are appearing on tablets.
All these reasons add up to the current trend that tablets are becoming the preferred, primary device for millions of people around the world.
Apotheker saw people were moving away from PC’s, but didn’t know what consumer trend was moving toward. Whitman has the foresight to see where it is going and is moving accordingly. I believe this move will help HP stock see some positive movement not just in sales, but also because investors like to see that those in charge know the right way to go and will lead their company with a steady hand toward profitability.
Summary
Whitman is making the right call – a much needed affirmation for the company. HP once sank due to its leadership, only to rise stronger and better equipped to remain a formidable presence in the technology market. I think great returns are on the horizon and I would buy ahead of earnings. HP is taking a new strategic direction - one that I think makes perfect sense.
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