Time to Hit the Delete Key on HP

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Hewlett-Packard (NYSE: HPQ  ) , one of the grand old ladies of the tech industry, has seen its prospects evaporating for quite some time now. In May, however, there was a brief glimmer of hope when President and CEO Meg Whitman predicted a return to growth in revenue in fiscal 2014.

But in its current fourth quarter, management reversed its earlier stance, saying growth was unlikely both now and in 2014 . Investor response was palpable, as the HP share price dropped by a substantial 12 % following the disappointing long-term outlook.

Whitman's fears do not seem unfounded, and HP is unlikely to be able to keep its head above the water in the long run. Here's the lowdown on what really went wrong with the company and why the future looks bleak.

A painful goodbye to the PC
HP was, until recently, pinning its hopes on newer variants of touchscreen PCs and notebooks. However, merely bringing out newer variants of these products will not bring in more revenue in today's mobile world. In July, Gartner confirmed that worldwide PC shipments have fallen for five successive quarters . HP's PC division revenue during its latest quarter fell by a substantial 11% on a year-over-year basis, a fact that contributed to its gloomy long-term outlook.

As it is, the company has already been pushed into second place in worldwide PC shipments by peer Lenovo. And HP is finding it hard to compete with traditional rivals such as Dell (UNKNOWN: DELL.DL  ) on pricing. The latter has impending plans to go private as part of a restructuring initiative taken by Chairman Michael Dell. The company has slashed prices on its personal computers in an effort to grab a larger share of the market , even as its profits fell by a whopping 72% in the latest reported second quarter.

While HP has made every effort not to cut down on product prices in a bid to ensure profitability, the strategy may not work because consumers just aren't buying enough personal computers. And the fall in PC shipments also meant a 4% slide in revenue in the company's printer ink division, where margins tend to be high .

Can enterprise carry the load?
Realizing that selling PCs may be a lost game altogether, HP's management pinned its hopes on its enterprise division to kick-start revenue growth, but even that proved elusive. In fact, the 9% fall in revenue in the third quarter from the enterprise division, which accounts for around 25% of HP's total sales , was an even bigger blow since the PC division decline was expected.

With the global economy recovering slower than expected, companies are spending less on enterprise-related equipment that includes servers and networking gear. The trend is prevalent not only in the U.S. market, but also in other crucial markets such as Europe and China, a fact already acknowledged by HP .

The trend is unlikely to change any time soon, calling into question Whitman's decision to replace the company's current enterprise group head. Additionally, HP also has to contend with tough competition in its enterprise data center segment from rivals such as IBMOracle, and Cisco (NASDAQ: CSCO  ) .

Cisco has also faced declining year-over-year sales in Europe and the Asian region, thanks to a combination of cheaper products from competitors and the overall slow economic recovery. That prompted its management to resort to cost-cutting measures by doing away with as many as 4,000 employee positions .

Is 'Moonshot' a bright spot?
One area of HP's enterprise division that has managed to generate a lot of attention recently is the "Moonshot" brand of servers.

A Moonshot server is designed to resemble a cartridge, and its primary advantage lies in its small size. It occupies much less space than other conventional servers. The fact that several Moonshot servers can be packed within a single rack is a distinct advantage for companies that depend on data centers for their operations .

These servers also prove to be much more energy-efficient, consuming less power than conventional ones. However, with exact Moonshot server sales figures being unavailable as of yet, it's difficult to predict whether they would truly make a significant future contribution to HP's overall revenue.

Foolish final thoughts
The only good thing that can be attributed to HP's current management is a substantial $9 billion reduction of its massive debt pile , the majority of which was the result of the ill-fated "Autonomy" acquisition. Then again, considering HP's plans to make use of the resultant free cash flow for even more acquisitions, investors should wonder whether that will make much difference to a company that has failed to get its basics right.

In the end, the fundamental problem with HP remains. This is a company that has failed to make a successful transition into a post-PC world, where mobile devices currently hold sway. HP has simply failed to come up with a significant new and inspiring product line, one that's likely to transform into a robust future source of revenue.

To make matters worse, the economic situation is unlikely to lend a helping hand to the company anytime soon. This is definitely a time to look beyond the buyback and dividend scenario for HP. Deleting this stock from your tech portfolio may turn out to be a wise move.

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Read/Post Comments (3) | Recommend This Article (5)

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 September 05, 2013, at 10:45 AM, cbglobal wrote:

    Right.... HP's PC business is Compaq which it bought about 10 years ago. So what did HP do for the first 60+ years before that? PCs are only about 15% of the business. So stop making it sound like 100%.

    It you remove PCs and value the rest at IBM's value, the stock would be $50-60 all by itself.

    This is why insiders are loading up and thanking you for trashing it, giving them such a bargain.

  • Report this Comment On September 05, 2013, at 12:13 PM, phatandfoolish wrote:

    why they chose that one-hit-wonder for their CEO is a complete mystery...

  • Report this Comment On September 05, 2013, at 1:57 PM, bigfool4you wrote:

    Not sure why MF has such a negative outlook on HPQ... And why MF constantly sais "the PC is dead". Granted, PC business is a small % of overall HPQ business...

    But folks have been saying "the PC is dead" for some 15 years now. Ever tried doing a spreadsheet or a presentation on a tablet??? Perhaps handhelds have eaten up some of the consumer space, PC's are here to stay for some (long) time in business... IMHO...

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