Hewlett-Packard (HPQ) is an enormous company, one that created more than $25 billion in revenue during its last quarter alone.
Due to its size, investors don’t always notice areas of its business that are performing exceptionally well — businesses that have the potential to drive long-term gains in HP stock. One such example is HP’s cloud IT business, a segment that will drive much of HP’s enterprise growth following the split.
Let’s take a closer look at the hidden value in HP stock.
An Under-the-Radar Growth Driver for HP Stock
First and foremost, I recently explained why investors are best suited to buy HP stock right now and hold it for the long term. The company as a whole is undervalued at 8 times next year’s expected earnings, and while its printing and PC ops are cash cows, there are legitimate growth drivers in its Enterprise segment.
Specifically, HP is a dominant force in the cloud IT market, an industry that created nearly $7 billion in worldwide sales during the second quarter. On top of that, the cloud IT market is growing very fast as companies move their IT from on-premise to the cloud, up 25.7% in the second quarter. HP owns this market, and is quickly creating separation from its competitors.
According to IDC, HP owns 16.3% of the cloud IT market. That’s up from 15.6% last year after HP grew cloud IT revenue 31.1% year-over-year to $1.12 billion. The problem is that this exceptional growth and market leading presence gets overshadowed by the pure size of HP, and the many HP divisions with little or no growth, like the high-margin printers and PC segments.
However, once HP’s quarterly revenue is cut from $25 billion to $12.5 billion, after the split, its cloud IT performance will represent a bigger chunk of sales. Not to mention, this is a market that is going to keep on growing, and with HP splitting its business in two and allocating more energy to cloud IT, there’s a good chance its market share will grow even more.
Why Cloud IT Is Significant for HP Stock
That said, cloud IT infrastructure spending is expected to grow 26.4% to $33.4 billion this year. Beyond 2015, IDC expects a compound annualized growth rate of 15.6% through 2019 until revenue reaches $54.6 billion.
Even if HP’s other enterprise businesses don’t grow from now through 2019, it should add an extra $3.5 billion in annual revenue by 2019 based solely on the industry’s growth. If HP can continue to grow its market share, say 20% by 2019, it could add an additional $5.5 billion in annual revenue, with cloud IT accounting for more than 20% of total revenue for HP’s enterprise business. This improvement alone could drive top-line growth of 10% by 2019.
With that said, HP will more than likely achieve growth from other segments of its enterprise business, as well. The potential to find growth is one big reason that HP split its enterprise ops from printing and PCs, allowing the former to drive shareholder value with more explosive top-line growth and for the latter to drive shareholder value with its high margins and return of free cash flow.
It’s a win-win scenario for stock holders of both HP companies, with HP’s cloud IT performance being a perfect example of an under-the-radar strength of HP’s business that will soon become a bigger piece of its business puzzle. In essence, HP’s cloud IT business performance is yet one more reason to own HP stock.
As of this writing, Brian Nichols owned shares of Hewlett-Packard.
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