IBM's Loss Is Hewlett-Packard Company's Gain in Hardware

Hewlett-Packard Company is rapidly taking market share from IBM in the storage and mainstream server markets.

Apr 21, 2014 at 5:44PM

Hewlett-Packard Company (NYSE:HPQ) still has plenty of work to do to complete its turnaround, particularly in the enterprise services business segment. However, in the enterprise hardware market, HP is benefiting immensely from longtime rival IBM's (NYSE:IBM) problems.

IBM has been investing heavily in its higher-margin software and services businesses. This may be the right strategic move for IBM, but a side effect is that its hardware product lines are really struggling. By contrast, HP is primarily a hardware business and it is now starting to take market share from IBM on multiple fronts.

IBM enterprise hardware sales evaporate
After making brief gains in the high-end mainframe server market in late 2012 because of a new product cycle, IBM has seen a big drop-off in all of its hardware businesses. Revenue in the Systems and Technology business unit fell more than 18% in 2013.

Images

IBM's hardware revenue has been falling at a double-digit rate recently.

The biggest drop came in Q4, when every single hardware product line produced a double-digit revenue decline. Overall, Systems and Technology revenue fell 26% that quarter and pre-tax income plummeted nearly 80% because of tough comparisons to the prior-year quarter.

Shortly after IBM reported its Q4 results, it announced a deal to sell off its low-end server business to Lenovo for $2.3 billion. This product line, known as "System x," has been losing market share recently. Revenue declined 16% in Q4, and the rate of decline ticked up to 18% in Q1, the first quarter following the announcement.

Hewlett-Packard makes its move
HP hasn't had an easy time in the enterprise hardware market, either. Its highly profitable Business Critical Systems products (the equivalent of IBM's System z) have been in long-term decline for several years. Business Critical Systems revenue has plummeted from $2.3 billion in FY10 to $1.2 billion last year.

Images

HP is making progress in some parts of the enterprise hardware market.

However, unlike IBM, HP is making progress in other parts of the hardware market. As a result, it has posted growth in enterprise hardware sales for two straight quarters.

While persistent double-digit revenue declines in industry-standard servers chased IBM out of that market, HP posted 10% revenue growth in its corresponding product line in Q4 of FY13, and followed it up with 6% growth last quarter. The customer disruption caused by IBM's decision to sell the System x business to Lenovo will give HP and other server manufacturers an opportunity to take even more business from IBM.

The industry-standard server market isn't the only area where HP is gaining share. Storage revenue has been roughly flat for the last two quarters. That doesn't seem impressive at first glance, but IBM's storage revenue declined 23% last quarter.

In storage, HP is finally reaping the benefit of its 2010 acquisition of 3PAR. Most experts -- including IBM CEO Sal Palmisano -- thought at the time that the $2.4 billion price tag was far too expensive. However, 3PAR sales have grown from less than $200 million annually at the time of the acquisition to more than $1 billion annually today, and HP continues to grow rapidly in this market.

Foolish bottom line
IBM is nearing the end of a decade-long shift away from hardware toward higher-margin software and services offerings. This strategy has produced good results historically, but it is also creating an opportunity for hardware-focused firms like HP to gain market share.

In industry-standard servers and storage -- two key markets where HP and IBM have been major competitors -- all of the momentum is on HP's side. IBM is now divesting its industry-standard server business, while its unwillingness to pay up for 3PAR has allowed HP to disrupt its storage business. All in all, IBM's struggles in the hardware business are creating the seeds for HP's budding turnaround.

Are you ready to profit from this $14.4 trillion tech revolution?

Every investor wants to get in on revolutionary ideas before they hit it big -- like buying PC maker Dell in the late 1980s, before the consumer computing boom, or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hypergrowth markets. The real trick is to find a small-cap "pure play" and then watch as it grows in explosive fashion within its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 trillion industry. Click here to get the full story in this eye-opening report.

Adam Levine-Weinberg owns shares of Hewlett-Packard and is short shares of Amazon.com. The Motley Fool recommends Amazon.com and owns shares of Amazon.com and IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers