Is HP the Next Nokia?

Disruption is a cruel mistress. It giveth and it taketh.

Nokia (NYSE: NOK  ) is a prime example of how rapidly a once-mighty titan can fall in the face of intense competitive pressures and disruptive threats. Nokia reigned as the top mobile phone maker in the world for a solid 14 years, only to be dethroned by Samsung earlier this year. The Finnish giant remains in the midst of a multi-year turnaround hinged on the success of Microsoft (Nasdaq: MSFT  ) Windows Phone 8, led by an ex-Microsoft employee.

However, Nokia remains just one of the victims of this trend that I like to call "the mobile revolution" (OK, other people call it that too). The traditional PC market is the most obvious industry to be ravaged by this massively disruptive trend. Is Hewlett-Packard (NYSE: HPQ  ) the next Nokia?

A tale of two stocks
Simply comparing a price chart of both companies shows a remarkable similarity in their respective trajectories. One difference is that Nokia is further along in its downfall than HP, but at this rate, HP is well on its way to the same destination.

NOK Chart

Nokia data by YCharts.

Both companies also count gadgets among their core businesses, while each also has other segments to help pay the bills. Nokia has its networking operations and insignificant mapping business, while HP has its printing, services, and enterprise server businesses. Both are also relying heavily on Microsoft's next generation of operating system platforms for their fate: Nokia with Windows Phone 8 and HP with Windows 8.

Let's look at two of HP's biggest businesses in particular and see how the trend toward mobile computing might affect the iconic company.

Personal systems group
The rise of smartphones and tablets is wreaking havoc on PC sales, and HP's PSG segment is the first to feel the brunt. Through the first three fiscal quarters ending in July, total sales in this segment were down 8.5%. This was primarily driven by laptop and desktop revenues falling 10.5% and 7%, respectively. In the third quarter alone, laptop units were down 12% and desktop units fell 6%.

Thanks to absurd CEO turnover, a cohesive mobile strategy has yet to emerge from HP. Mark Hurd never got to see his vision pan out, as he was ousted amid a sexual harassment scandal and his successor Leo Apotheker promptly axed webOS hardware operations. Now current CEO Meg Whitman is hoping Windows 8 will be the tablet turnaround HP needs, while also confirming a smartphone is in the works. She later clarified that no HP smartphone will be launched in 2013.

At 30% of total sales, weakness in this segment is a major drag on consolidated results.

Imaging and printing group
If it weren't for absurdly overpriced printer ink, this segment would be nothing. Supplies comprise two-thirds of the IPG's revenue, and hardware revenue is down 5.7%. In a misguided attempt to piggyback its printing business on the rise of smartphones, HP exec Todd Bradley recently noted that web-enabled print services (such as printing from smartphones) would boost the business.

I have never heard of people interested in printing from their smartphones, much less seen anyone perform such a feat. This mythical task must be out there somewhere in a niche corner of the universe, but it won't be enough to stem the IPG's decline.

Through the first three quarters, revenue is down 7%, yet still comprised 20% of the top line.

Know when to fold 'em
Between just those two operating segments, we're talking about half of HP's business under heavy fire directly from the shift to mobile devices, where it has no presence currently, and its future forays remain uncertain and will likely prove unsuccessful. Its other IT businesses are facing intense competition from the likes of IBM (NYSE: IBM  ) , which it aspires to be like, and its server hardware division is being threatened by major trends like virtualization.

At this rate, HP very well might be the next Nokia: a fallen industry leader that failed to keep abreast of major trends. It's not in quite as dire straights, and if the turnaround attempts prove unsuccessful, it won't be Whitman's fault. She was dealt a bad hand, and sometimes investors just need to know when to fold 'em.

HP and Nokia both need Microsoft, which speaks to the importance of Microsoft's role in the computing value chain. The software giant is making major pushes into the mobile realm with its next-generation operating systems later this year, so investors need to read up to prepare themselves. This new premium ticker report lays out the company's biggest opportunities and most threatening risks. Click here to get started.

 

Evan Niu, CFA, has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2012, at 7:15 PM, llIlllIlllIlllIl wrote:

    HP do not have a Windows Phone device ready yet so they are obviously still not taking the required steps to ensure future relevance.

    Nokia's mistake was focussing on China (fools market), and then not getting with the Windows Phone programme until a full year after the other OEMs. But at least they have been doing things right since then, will be interesting to see how much HP screw up their business before implementing the required changes.

  • Report this Comment On October 09, 2012, at 9:08 PM, jhf678 wrote:

    Hey Fool: how is 25% and 80% similar?

  • Report this Comment On October 09, 2012, at 10:32 PM, sjminess wrote:

    Very difficult to follow the logic of your article. You clearly point out a shift from pc to mobile. Then the article shifts to the mythical task of printing from a smart phone. So basically you think everything will shift to mobile and people wont print from mobile; so we must conclude printing is dead along with the pc. The mythical task of printing from a smart phone is something simple and conveinent. Its a clear advantage HP has over its competition. I bought an HP printer because of HP mobile printing. Download the HP print app and get in touch with the technology you write about.

  • Report this Comment On October 10, 2012, at 1:24 AM, primus001 wrote:

    Evan Niu, "CFA", needs to learn how to read financial statements and value businesses - lessons from his year 1 curriculum that he has obviously forgotten. Examples from his laughably stupid article:

    1. Nokia has an "insignificant" mapping business: please state the net earnings contribution from Navteq and impute its proportional contribution to Nokia's equity value. And please recite the one reason users do not like the iPhone 5?

    2. "Both companies also count gadgets among their core businesses" - hardly a basis for drawing parallels between 2 companies. Assuming he means PCs are the gadgets referred to in his analysis of HP, then please calculate the relative contribution of PSG to HP's net EARNINGS power. He should find that it does not qualify as a "core" business on that basis.

    3. HP's "server hardware division is being threatened by major trends like virtualization." This betrays a complete ignorance of what virtualization means, unless he thinks it means data and information now float in "virtual" space without requiring any sort of hardware. Now name the one growth area HP sees in servers (lower margin, to be sure, but growing nonetheless).

    Complete these simple assignments, and establish a credible level of intellectual rigor before posting again.

  • Report this Comment On October 10, 2012, at 1:57 AM, SuntanIronMan wrote:

    Like sjminess, I also own an HP printer specifically for the ePrint functionality. Granted, I don't use the printer much for that purpose, but I did buy it specifically with printing from my iPhone in mind. I could have bought a slightly cheaper printer that did not have smartphone printing as an option. I knew when I purchased the printer that I wouldn't use ePrint much, but I at least wanted the option.

    And printing from the iPhone/iPad is very seamless process. A process that Apple made a fairly big deal about a few years back. Nothing mythical about it.

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