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

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.

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.

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.


Read/Post Comments (0) | Recommend This Article (4)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2923015, ~/Articles/ArticleHandler.aspx, 11/22/2014 4:50:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement