Hewlett-Packard (NYSE:HPQ) warned investors and analysts just last week: Don’t expect a repeat of Dell (NASDAQ:DELL). Decreases in PC component costs, a key factor in giving Dell its surge this month, have not translated to dramatic increases in revenue for H-P, which warned late Tuesday that first-quarter profit would also come in below current Street expectations.
The stock was off 10% in Wednesday trading, contributing to the continued selloff in tech stocks and keeping a lid on the Dow Jones Industrial Average’s attempt to reverse Tuesday’s massive slump.
Hewlett-Packard CEO Leo Apotheker highlighted declines in PC spending by consumers as the root of his company’s woes. It’s true that PC sales aren’t what they were for H-P just five years ago, but the company is still No. 1 in PC shipments, which, for H-P, dropped 1% in last year’s fourth quarter.
The research firm Gartner found that on the whole the PC industry did OK last year, with 308 million desktop, notebook, and laptops shipped, representing growth of 14% over 2009. But the fourth quarter wasn’t as strong as expected. The reason was, according to Gartner analyst Mikako Kitagawa, “media tablets such as the [Apple (NASDAQ:AAPL)] iPad.”
Tablets are, at least for the moment, a festering thorn in the sides of the world’s leading PC manufacturers, with their rising popularity a threat to the resurgent Dell as much as H-P. It isn’t just consumer adoption of the technology that threatens those companies, but IT and business customer adoption as well. Another key reason Dell’s earnings proved so much stronger than H-P’s was that its sales to businesses looking to upgrade antiquated hardware were better than its competitor’s (H-P’s IT services segment fell 2% in the previous quarter.)
PC sales to business customers are going to continue to fall for both companies going forward, as those customers look to provide tablets to employees and executives.
Dell and H-P are working fast to adapt. A week ahead of its earnings report, Dell said it would release two 10-inch tablet PCs this year, one running Google (NASDAQ:GOOG) Android and another running Microsoft (NASDAQ:MSFT) Windows 7. Dell Vice President Steven Lalla said that even though Windows 7 isn’t optimized for tablet implementation, his company was incorporating it to serve business clients looking to move to tablets while sticking with familiar software.
That strategy may very well work for Dell and help its business weather through gradually slowing PC sales this year.
But what about H-P? The company already tested those waters last November, releasing a limited run of the Slate 500 Windows 7 tablet hoping to curry interest with business clients. The device performed better than expected, with 9,000 tablets sold rather than the 5,000 the company predicted, but clearly not well enough to continue manufacturing.
H-P has instead gone the opposite route from Dell with the TouchPad, a consumer-friendly tablet running on H-P’s own Palm-developed WebOS 3.0 operating system. Using its own software is a gamble for HPQ, but it’s one that could pay off if the device is a success when it comes out this summer.
On the other hand, without knowing what the TouchPad’s retail price will sell for, it’s impossible to predict how consumers and business clients will respond. At any rate, H-P will have to continue to contend with a flood of tablet competitors that are already taking a piece of H-P’s slowing PC sales.
At the time of publication, Anthony John Agnello did not own a position in any of the stocks named here.
