Why HP Inc’s Effort to Boost HPQ Stock Remains On Track

Here's why HP's printing business is set to grow

HP Inc (HPQ) is fighting the odds to turn around its business, particularly the printer division. The company’s printing business has been facing challenges like sluggish demand and cut-throat competition in the space.

Notably, despite registering strong PC revenues after several quarters of year-over-year decline, HP’s total revenues fell 4%, primarily due to sluggish performance at the printer division.

Challenges in HP’s Printing Business

HP is one of the two publicly traded entities that were formed after the November 2015 split of Hewlett-Packard Company. Besides HP Inc., the split led to the formation of Hewlett Packard Enterprise Co (HPE). HP focuses on PCs and printing products and services.

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It should be noted that the demand for printers is not as strong as it was 10 years ago. It has witnessed a secular decline over the past several years as consumers are increasingly favoring digital alternatives over printed materials due to their cost effectiveness.

Furthermore, over the past few quarters, HP has been losing market share to its Japanese rivals — Canon Inc (ADR) (CAJ) and Epson America Inc — due to intense price competition. These Japanese manufacturers have been able to slash prices due to a weak yen compared to the U.S. dollar.

Although HP is still the biggest printer manufacturer in the world as per IDC, the company’s market shrunk 420 basis points (bps) year over year to 36.6% in second-quarter 2016. In the same quarter, however, Canon and Espon’s market share expanded 100 bps and 220 bps, respectively.

Notably, in third quarter fiscal 2016, HP witnessed a 14% year-over-year decline in printing revenues, primarily due to an 18% plunge in supplies revenues and weak performance at the hardware segment. HP’s total hardware unit sales were down 10%, primarily due to declines of 2% and 14% in Commercial hardware units and Consumer hardware units, respectively.

HP’s Counter Strategies

In an effort to revamp its printer business, HP is looking at every aspect of growth including product innovation and differentiation, and acquisition or expansion of 3D printing capabilities.

It should be noted that if demand for anything does not remain as strong as it did once, one should resort to creative ideas to make innovative and differentiated products for gaining greater market share from its rivals.

It seems that HP has learned this lesson and is focusing on developing innovative and differentiated products. Last week, the company unveiled a smart pocket-sized printer for smartphones and tablets called Sprocket.

The device which uses ZINK (Zero Ink) technology is capable of producing 2×3” stick-able snapshots taken from tablets or smartphones. Users have to just connect the device via Bluetooth and get their selected photo printed in less than a minute.

Sprocket is likely to grab the attention of millions of smartphone users owing to its price. HP has priced the device at $129, which is about $70 lower than a similar device called Instax Share SP-2 by Fujifilm.

We believe that Sprocket will open new avenues of revenue generation for HP’s printer business. Notably, according to the Deloitte Global report, about 2.5 trillion photos are likely to be shared or stored online of which 90% will be clicked on a smartphone in 2016.

We believe that the attractive pricing of Sprocket will lead buyers to take a printout and create an album of their memorable moments apart from sharing them on social media sites like Facebook Inc (FB) or Twitter Inc (TWTR). 

Additionally, the company, on Sep 12, unveiled the all new A3 multifunction printers (MFPs). According to the company, “The complexity of traditional copiers makes repair and maintenance too inefficient for our partners and customers.” It also added “By leveraging our superior printing technology, we can change the status quo with next-generation A3 multifunction printers that improve the overall customer and partner experience while also serving as a springboard for growth in managed print and document services. This is what we mean by reinventing printing.”

Apart from focusing on developing differentiated products, HP is also looking at acquisitions to drive growth. Most recently, the company signed a deal to acquire Samsung Electronics’ printer business for a purchase price of $1.05 billion.

The acquisition will expand the company’s printing business as Samsung’s printer business has more than 6,500 printing patents. All these will support development and manufacturing of HP printers, going forward.

Besides eliminating a major competitor, the transaction will also help to control prices. The acquisition will also give HP access to Samsung’s partners and strengthen the former’s position across various geographies.

Going ahead, the company is also trying to enhance its 3D printing business capabilities in an effort to revive tumbling sales. Note that even though HP has been operating in this space for almost five years now, the company lags behind 3D Systems Corporation (DDD) and Stratasys Ltd.

Thus, in order to strengthen its presence in this space, HP recently unveiled its Jet Fusion 3D Printing Solution with two models to choose from – 4200 and 3200. Unlike 3D Systems and Stratasys which target all kinds of consumers, HP emphasizes only on industrial markets because of their ability to afford a premium range of 3D printing solutions.

To satisfy customers in this space, HP has collaborated with various companies like BMW, Nike Inc (NKE) and Autodesk, Inc. (ADSK) with an aim to develop more advanced 3D printing technologies for a wide array of industrial use.

Additionally, the 3D printing market presents significant long-term investment opportunities as a large number of engineers, designers, architects and entrepreneurs are now turning to 3D solutions for primary designing and product modeling.

According to market research firm CONTEXT, over half a million 3D printers have already been shipped across the globe between the 1980s and mid-2015, and the industry is currently on track to ship its millionth unit by 2017. Data from the Wohlers Report 2014 revealed that the worldwide 3D printing industry is expected to grow from $3.07 billion in 2013 to $12.8 billion by 2018, and will exceed $21 billion by 2020 at a CAGR of 34%.

Bottom Line on HP Inc: A Strong Effort Should Reward HPQ Shareholders 

HP’s efforts to revive its printing business have been commendable. Its strategy of focusing on product innovation and enhancing 3D printing capabilities will help to stabilize falling revenues at its printer division.

Moreover, the acquisition of Samsung’s printer business will help HP in further expanding its market share.

Currently, HP carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/09/will-hps-efforts-to-revamp-printer-business-yield-results/.

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