For decades now, commentators have been calling for the death of paper. A Businessweek article from 1975 proclaimed that, by 1990, nearly all business records would be strictly electronic.
And yet, 38 years later, printing remains big business.
Still, there is growing evidence that a transition has finally begun to take place. Companies dependent on printing have posted disappointing results, and further downside seems likely.
Hewlett-Packard tumbles as printing revenue drops
Shares of Hewlett-Packard (HPQ +3.02%) plunged over 12% following a disappointing quarter. The tech giant has numerous business segments -- from servers to software to PCs -- but printing continues to represent a meaningful chunk of HP.
In the quarter, printing represented about 21% of HP's total revenue. Printing revenue declined 3.6% from the prior year, while earnings before taxes were down more than 4%.
On the company's earnings call, CEO Meg Whitman actually cited the company's printing division as benefiting from "solid execution." She brought light to the fact that HP's printer hardware is growing market share.
Printing remains one of HP's most profitable business segments, with margins second only to HP's software. Yet, if a division in decline is considered good, it's little wonder that HP is in trouble.
Canon blames weak economy for its problems
HP isn't the only company with massive printing exposure. Japanese electronics giant Canon (CAJ +0.44%) is primarily dependent on two products: cameras and printers. And despite the impressive rally in Japanese stocks (the Nikkei 225 is up nearly 30% year-to-date), Canon shares have still lost more than 21% of their value this year.
That decline has been commensurate with Canon's poor earnings. In July, Canon posted weaker-than-expected results and lowered its full-year guidance. In its earnings release, the company blamed weak economic conditions in China and Europe:
[D]emand for multifunction devices (MFDs) declined due to economic uncertainty and a deceleration in economic growth in emerging countries, while demand for laser printers decreased due to the sluggish economy. ... Overall demand for inkjet printers also declined due to the continued weak economy.
But I can't help but wonder if Canon's problems are technologically based. If businesses are finally beginning to shift away from printing, Canon shouldn't be expected to do well, even with the cheaper yen.
Staples plunges as retail sales decline
Staples (SPLS +0.00%) doesn't make printers -- but it sells a lot of them. It also sells a lot of ink and paper. A quick perusal of the retailer's website reveals Staples' deep focus on the space -- ink, toner, and paper get top billing on the website.
Shares of the retailer plunged over 14% on Wednesday after the company reported poor results. In the second quarter, Staple's sales declined 2% from the prior year, while income from continuing operations fell about 17%.
Staples blamed the sales decline on weakness in ink and toner, among other segments. Admittedly, demand for copy and print services was up. Perhaps if businesses are doing less printing themselves, they're more likely to pay Staples to do it for them.
Of course, to be fair, Staples sells a lot more than ink and paper. On the company's earnings call, it said it saw strength in other sectors, specifically furniture, tablets and break-room supplies. But can that carry Staples? Perhaps, but customers may be more inclined to get those products from other, more focused retailers such as Best Buy, or dedicated furniture stores.
Tablets and the cloud
The widespread adoption of tablets, and other ultra-portable computers like Ultrabooks may be fueling the shift. Although email is nothing new, the ability to pull up electronic documents on a computer that weighs less than a pound and easily fits in a briefcase, is. Moreover, the increasing popularity of cloud storage solutions like Google Drive and Dropbox make sharing electronic files easier than ever before.
And these technologies still remain in their infancy. The Pew Research has been tracking tablet ownership since May 2010, when just 3% of American adults owned a tablet. That figure jumped to 25% last August, and reached a 34% in May. At the same time, tablets continue to get smaller and lighter (Apple's next iPad is rumored to be much smaller and lighter), making them even better replacements for traditional paper.
Investing in the printer space
Although it's a trend that's been discussed literally for decades, the paperless office now looks like it might finally be becoming a reality. Companies that remain reliant on printing -- HP, Staples, and Canon -- have posted poor results. As cloud-based storage solutions become more popular, and tablets get both smaller and lighter, this trend is likely to accelerate in the coming quarters.
HP, while a massive company with many other divisions, still gets a large chunk of its revenue and profit from printing. Canon, too, remains heavily reliant on the sale of printers. Staples sells many other products, but printers, ink, and toner remain a staple good. As the printing industry goes into decline, investors should consider avoiding all three stocks.
