Why Hewlett Packard’s Troubles Never Seem to End?
Subhadeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tech giant Hewlett Packard (NYSE: HPQ) seems to be facing problems on all fronts, and the Street is definitely not impressed as the stock has fallen a substantial 26% this year. Investors are anticipating a slump in demand for HP’s famous line of printers, as close competitor Lexmark International (NYSE: LXK) slashed its revenue and income outlook for the second quarter, thanks to weakening European market demand and a stronger-than-expected dollar. And the real bad news is that Lexmark does not expect the situation to improve for the rest of the year as well. Other printer makers such as Xerox (NYSE: XRX) are faring no better, as poor demand has dragged down the company’s stock value.
The chief problem with HP seems to be that it’s dependant on its printing division, with more than one fourth of its profits coming in from sales of printer and ink cartridges. With the economy remaining weak, a large part of HP’s enterprise customers are increasingly focusing on cost-cutting measures, and printing is one of the first things to face the knife. The other factor which is keeping potential customers away is the extensive use of mobile devices and tablets, which simply makes printing an unnecessary option. With HP depending to a large extent on sales of its printer ink cartridges, this might be subsequently hit as well.
And if HP was thinking of falling back on its PC sales to bolster profits, Lenovo is sure proving to be a major obstacle to the process. The Chinese manufacturer of the famed ThinkPad is fast overtaking HP as the planet’s largest computer maker in terms of sales. With recent data from research firm Gartner revealing that Lenovo is just 0.2 percentage points away from HP by way of worldwide market share, this is a very real threat for the beleaguered company. And if you look at the broader picture, there is a definite slowdown in global PC shipments, which makes the chances of a major revival even all the more slim for HP. Add to this the probable loss of some major customers such as General Motors (NYSE: GM), that has decided to do most of its IT-related functions in-house, and HP seems to be in a real tight spot here.
It’s not as if HP is not doing anything about it. The company recently upgraded its MagCloud portfolio, to enable its users to publish content themselves and stand out from its competitors, even as it tries to cash in on the recent boom in cloud computing. And let’s not forget that Lenovo is having to sacrifice profit margins in the race to become the No. 1 PC maker, a fact which raises questions about the viability of this strategy in the long run.
Having said all that, HP is undoubtedly going through a pretty difficult phase at present, a fact which is reflected in the downcast view of the company by JPMorgan. Investors also need to see if the company’s plans to merge its PC and printing divisions together actually do work in its favor, as it goes all out to combat the dip in sales and profits. It's Time to keep a close eye on HP for the moment.
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