May 29, 2012
Investors heaved a sigh of relief – rhetorically speaking – last week, when Hewlett-Packard (HPQ) announced plans to boost its bottom line by cutting 27,000 employees, saving some $3.5 billion between now and 2014. That news helped offset the 31 percent plunge in the computer manufacturer’s profits in the eyes of investors, who rewarded CEO Meg Whitman’s dramatic announcement by driving the share price sharply higher, to the $22 level where it still is trading now.
But HP’s stock still lags the market, having lost some 40 percent since last summer’s 52-week highs – and Whitman will have to do more than just cut costs to convince investors that she has a way for the company to thrive in an era that is dominated by tablet computers and mobile computing. Sales of the company’s laptop computers fell 6 percent in the just-ended quarter; today, many customers still interested in relying on a laptop rather than a more compact iPad or a mobile device are turning to Apple’s (AAPL) MacBook range.
HP has a lot to prove to both the industry and its investors. In the months leading up to Whitman’s arrival at the company early last year, the company’s business strategy looked downright baffling. It launched the TouchPad, a potential rival to Apple’s iPad powered by the company’s own webOS system, but within two months had pulled the plug on the new product. It also announced plans to axe its personal computer division altogether, spinning it off to shareholders as a separate company and focusing instead on the less-stagnant peripherals business. That plan also proved to be short-lived.
Investors’ current aversion to risk is likely to show up in a degree of skepticism about the ability of a company that has waffled on such major strategic questions to deliver a compelling new vision for its future – and then to execute on it. Meg Whitman – the company’s fourth CEO in the last seven years – may have a solid Silicon Valley track record from her years as the CEO of eBay (EBAY), but that may not be enough to pull off the kind of resurrection she must oversee. The world of computing has moved on in the last decade, and it has done so without Hewlett-Packard or its archrival, Dell (DELL), in the lead. These two venerable firms were in the vanguard of transforming the computer into a mainstream household possession, but have allowed other firms to pick up the slack in what are emerging as the key drivers of the way we will use computers in the next decade.
Mobile computing, in particular, has transformed the way we work and communicate online, but HP didn’t find a way to profit from the smartphone boom. To the extent that today’s consumers are willing to use a larger device, it’s likely to be an iPad or other tablet – and again, HP has been unable to keep up. Then there is the cloud, which offers users a way to store and retrieve data with less expense and greater efficiency. Here, IBM (IBM) and Amazon (AMZN) and a host of newer companies have been among the leaders.
One of HP’s biggest assets is its roster of big corporate clients, and part of Whitman’s new strategy is to be their vendor of choice when it comes time for them to develop a “cloud capability.” HP could help those clients build their own clouds, or pitch them on its own cloud computing center. Still, this could be a tough battle, as storage is far from a high-margin business; HP will need to find a way to add value to the mix.
Ultimately, if it is going to thrive and not simply survive, HP – and Dell as well – will need to identify the kind of new product that taps into still-unarticulated consumer needs in the same way that the iPod did when Apple launched it nearly a decade ago, or that smartphones did when they made their debut a few years later. HP hopes its upcoming range of lightweight “ultrabooks” will compete against Apple’s MacBook Air, but devising a new version of an existing product to compete against a rival’s offering is rarely a successful strategy for leapfrogging the competition. And leapfrogging its rivals is exactly what HP must do in the coming months and years in order to remain a power player in the high technology arena.
It’s far too early to say conclusively that HP is down for the count – but it’s equally premature to suggest that Whitman’s cost-cutting measures will pay off in the shape of a winning strategy. The stock may have bounced off its lows, but at least some of that buying was coming from short-term traders and investors hoping that Whitman’s announcement will cause value investors to step in and buy after the long decline in the company’s share price. To the extent that happens, it may put a floor under HP’s stock – but bulls will need more than just layoffs and cost cutting measures to convince them that this former growth stock can occupy that role in their portfolios once more.