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HP's Turnaround Story May Be Coming to an End

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Last year was a difficult one for Hewlett-Packard (NYSE: HPQ  ) shareholders, as the stock was down 46% during the year. Thus far in 2013, shares are up 37% while the Dow Jones Industrial Average (DJINDICES: ^DJI  ) has risen 11%, but HP was up even more at one point. Shares are currently trading at $19.56, but on March 28, they closed at $23.84, the highest they've been in 2013.

So what happened?
During 2012, investors had very little confidence in the company, and the turnaround story was just beginning. But as the year came to an end, the company posted some decent results, and there were signs that the ship was heading in the right direction. The positive sentiment rolled into 2013, and new investors began piling into the stock and running the price higher.

That all ended when April started. Shares hit their 2013 high on the last trading day of March and have been on a downward slide ever since. The first week of April, HP lost 7.84% of its value, and one analyst may have hit HP's problem on the head. In an April 4 report, Bill Shope from Goldman Sachs predicted that shares would fall 31% from their closing price that Monday of $23.31. He argued that while the restructuring of the company would help, he thought any gains to be made were going to be wiped out by weaknesses in other areas of the company's business.  

Since Shope made his prediction, shares have fallen $3.75, or 16.08%. Shope's calls are looking pretty prescient right about now.

Two weeks ago, we saw an IDC report warning that personal computer shipments fell 13.9% in the first quarter -- the largest decline IDC has ever recorded -- while analysts were expecting a drop of just 7.7%. IDC cited weak demand for PCs and unfavorable results for Microsoft's (NASDAQ: MSFT  ) Windows 8. Back in the fall, when Windows 8 hit the market, many PC experts said the new operating system would pull the industry back from its recent slump, as consumers refreshed their software and hardware. That refresh cycle clearly hasn't taken hold yet.

Another unit of HP's business that may also begin showing weakness is the server side. The company has received some accolades for its newest Moonshot server line, with some saying the servers are ahead of their time while they take up 80% less space and use 89% less energy. CEO Meg Whitman calls the servers evolutionary and innovative, with the potential to begin a new revolution. I'm not so sure. I think this also may be an area in which the company will soon begin showing weakness. 

Consider that the mother of all server companies, IBM (NYSE: IBM  ) just announced quarterly earnings this past week and missed on the top and bottom lines. It was the company's first earnings miss since 2005. The main reason for the miss was weak demand in the IT hardware segment, and analysts think this is a bad sign moving forward for the whole industry, not just for IBM.

Lastly, the Blackstone Group decided this week to pull its bid to take HP's closest competitor, Dell (UNKNOWN: DELL.DL  ) , private. While the reasons for the about-face haven't been revealed, and although the decision doesn't point to any one business unit in particular, it does say a little about the business as a whole.

HP needs to be hitting on all cylinders, and with PC sales slumping, that doesn't seem to be happening now. In fact, there's evidence suggesting it won't be happening later, either, as this industry continues to evolve.

More Foolish insight on Hewlett-Packard
The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP's rapidly shifting its strategy under the new leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor blip on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

Read/Post Comments (4) | 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 April 21, 2013, at 11:20 PM, cbglobal wrote:

    But what about the 72% of HP that is not PCs and servers? Question for you. How incompetent would you say someone is who bases opinions of partial data (and the worst data at that) while ignoring the 72% of a company that is growing and more profitable?

  • Report this Comment On April 22, 2013, at 8:33 AM, Investor1x wrote:

    And what makes you, Mr. Ex-Hotel Manager who now manages his own money (code for day-trader), qualified to torpedo HP's new server line with an "I'm not so sure" ??? At least have the decency to share your reasoning.

  • Report this Comment On April 22, 2013, at 1:17 PM, dmears wrote:

    Was Bill Shope's prediction really "prescient" or was it more likely causative?

  • Report this Comment On April 22, 2013, at 5:36 PM, XMFMT wrote:

    @ Investor1x, Thanks for your response. I am in no way trying to say the Moonshot server will fall because it's not a good product, hence I made the point to mention the new line has received a number of accolades, and I even went into detail about what people were saying.

    And to answer your question, the reason I'm not sure about how H-P's server business will perform, is why I mentioned that IBM is struggling. The server business is IBM's bread and butter, and since they are clearly having problems, I feel, others in the same industry main soon begin showing signs that they also are struggling.

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