During the Great Depression, Stanford engineers Bill Hewlett and Dave Packard launched a startup in a Palo Alto, Calif., garage. Based on a coin flip, they named the company Hewlett-Packard (NYSE:HPQ). But the tremendous success of the company certainly was more than luck. Bill and Dave were visionaries who helped to build Silicon Valley.
Unfortunately, things have not gone so well for the past decade or so. As seen last week, Wall Street is extremely concerned about HP’s new strategic direction. The company plans to spin off its PC business, spend $10 billion for Autonomy (a U.K. software company) and kill its tablet business.
HP’s stock price is down 43.47% for the year. In fact, the average annual return is 17.42% for the past three years.
Yet as seen with companies like IBM (NYSE:IBM) and Apple (NASDAQ:AAPL), there certainly are cases of strong tech turnarounds. So can the same happen with HP?
Well, let’s take a look at the pros and cons:
Pros
Enterprise offerings. HP has a wide array of technologies for servers, storage and business applications. The business has healthy margins and should see long-term growth. One key driver is the move toward cloud computing, which requires lots of infrastructure technologies. At the same time, the growth in mobile technology should provide an infrastructure boost, as well.
Services. This has become critical for large businesses. And with its EDS arm, HP is a top player in information technology services. Essentially, this segment helps to build customer loyalty and provide opportunities to upsell technologies. It’s a model that has worked quite well for companies like IBM.
Printer business. This is a gem. Of course, the company has a recurring revenue stream from ink purchases. HP also has been effective in building services around the business, such as with its photo site Snapfish.
Cons
PC business. This has been a huge drag on HP as the industry sports low margins and has little growth prospects. After all, Apple’s iPad is eating into market share. So while it is a good move to spin off the PC business, it really is too late (keep mind that IBM did this back in 2005). In light of the uncertainty, the deterioration is likely to accelerate. And competitors like Dell (NASDAQ:DELL) will capitalize on the situation.
Acquisitions. All in all, HP has demonstrated a terrible track record with its dealmaking. The purchase of 3Com was a dud. So was the deal for Palm — within less than two months, HP already has abandoned its mobile strategy. Now HP wants to spend $10 billion for Autonomy. True, the company is in the data analytics market, which is growing nicely. But the valuation comes at over 10 times revenues. And integration issues probably will be messy.
Morale. It must be tough for most employees at HP. No doubt, there will be layoffs. Also, the strategy still is unclear. With top engineers getting lush pay packages from Google (NASDAQ:GOOG), Facebook and Zynga, a brain drain might be looming.
Verdict
As seen above, HP faces huge challenges. A turnaround is likely to take several years, and it is far from clear whether the company will enjoy any measure of success.
Also, there are no signs HP will get back its focus on innovation. Instead, it looks like the company is committed to pursuing financial engineering.
Thus, for investors, the cons outweigh the pros on the stock.
Tom Taulli is the author of various books, including “All About Commodities.” He does not own a position in any of the stocks named here.
