HP’s Key Drivers To Our $30 Valuation

by Trefis Team
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Hewlett-Packard (NYSE:HPQ) has stumbled badly in the past couple of years from the acquisition of Palm, the constant reshuffling of its top management, the sudden resignation of former chief executive Mark Hurd and a struggling PC business. However despite macroeconomic concerns such as the Europe debt crisis, weak US growth and a slowing server business, it has managed to deliver solid results.

The company has been reinventing itself lately with the Envy Ultrabook and Sleekbook range, Windows 8 tablets and most notably its entry into cloud services that compete with Amazon. It has regained its top spot as the largest PC seller in the world and hopes to maintain that position with the Windows 8 tablets aimed at institutional buyers. The company also plans to reduce its workforce by 27,000 that will save it $3-$3.5 billion annually.

We take a look at the factors that will affect its businesses in 2012-2013 and explain our valuation of the company. We believe the market is undervaluing HP, and we expect its performance to improve, provided the current CEO Meg Whitman’s efforts to restore stability to the company pays off.

See our full analysis on HP

Key Business Drivers

1) Ultrabooks

The Envy Ultrabook and Sleekbook line of HP will drive its PC division in 2012. Currently this division constitutes ~15 percent of the current Trefis price estimate of HP.

With HP regaining its top spot as the largest PC seller in the world, these ultra-thin PC’s can pose a serious competition to ultra thin notebooks like the Macbook Air. It has adopted the Ultrabook design to run AMD chips and this line of Sleekbooks are priced significantly lower, starting at $599. This is cheaper than the Ultrabook range for similar configurations. With a range of cheaper ultra thin laptops, it can potentially gain a much larger market share than expected as its competitors have no offering in this range. It competes in this space primarily with Dell(NASDAQ: DELL) and Apple (NASDAQ: APPL)

2) Windows 8 Tablets And HP Thin Clients

HP has announced that it will resume production of consumer tablets running the Microsoft Windows 8 OS. This is its second foray into the tablet market as the TouchPad based on the WebOS was suspended last year due to poor sales. Restarting the tablet line is a strategic move to ride the tablet growth wave.

The new range of tablets will run on Intel’s x86 processor powered by Windows 8 Pro, and the ARM processor based Windows 8 RT tablets will not feature in this lineup. As HP is the world’s largest PC hardware manufacturer and has a huge institutional client base, the more powerful x86 format is likely to be popular as productivity tools with institutions and HP can leverage this network. The ARM tablet space is dominated by Apple with the iPad and HP is sticking to its strength by making productivity focused tablets. [1]

The company also has plans to make a line of tablet based thin clients. It will depend extensively on cloud storage and will enable content sharing between devices. This is probably aimed at better serving enterprise customer that already use its line of Windows 7 based tablets, specifically hotels, hospitality and medical industries. This move will help HP gain market share in tablets without directly competing with Apple iPad, which is more consumer centric. [2]

3) Merging printing and PC businesses

It also plans to merge its printing and PC computer businesses. The merger, with a combined business value of $65 billion, is aimed at improving its business efficiency by reducing costs and streamlining sales and marketing as well a unifying products. This could potentially bring about a significant amount of cost savings as the sales teams can be streamlined as they target the same customers. This would also lead to a lot of opportunities to cross sell and offer better prices to clients. The focus seems to be on printing as it searches for a location of build a $100 million printer factory in Asia.

4) Managed Printing Services

Most players in the printing industry are changing their business models to focus on providing printing as a service as opposed to selling just the hardware. The advantage of doing this would be better pricing power for the printing providers and it is cheaper for businesses to use printing as a service, rather than invest in printers while giving out maintenance contracts. The biggest advantage for the printing providers however tends to be the nature of service contracts, which are usually long term and would ensure consistent revenues. We expect HP to focus more on managed printing services going forward.

It has also made moves to tap into the printing needs of homes and small businesses by entering into an agreement with UPS, to provide print solutions on the go from any The UPS store across USA. HP competes with Lexmark International (NYSE:LXK) and Xerox Corp. (NYSE:XRX) in the printing solutions space.

5) Cloud Services

The HP Cloud is based on OpenStack and is a direct competitor to Amazon Web Services. Some of the services are HP Cloud Compute, HP Cloud Object Storage and HP Cloud CDN. This will have a pay as you go pricing. Cloud services are potentially the biggest new revenue source for HP in 2012.

HP also announced that it is expanding its Converged Cloud portfolio with Microsoft solutions that could simplify a customers transition to the cloud. The Joint Private Cloud initiative would provide pre-integrated solutions based on joint technology development, and will be a one-stop-shop for sales and support. The HP Converged Cloud solutions will feature Windows Server 2012 and provides customers with a clear path to go beyond virtualization and accelerate their cloud transformation. HP Services constitute 42 percent of our current Trefis price estimate of HP. It currently competes with Amazon (NASDAQ: AMZN) in this space. [3]

6) HP webOS Ecosystem In The Making

HP has released an open source version of the webOS in beta mode. The beta release consists of 54 webOS components and half a million lines of code under the Apache 2.0 license. Releasing the webOS as an open source software is likely to draw third party developers to the platform and help develop a healthy app environment for HP. [4]

It is releasing two development environments with the desktop development platform and mobile framework. The desktop development platform is the primary environment for improving the webOS experience and runs on Ubuntu Linux. The mobile framework is for users who want to deploy webOS on new devices. It includes an ARM emulator that can run core webOS services. HP is also working on a future release that includes the full webOS experience. This is, however, unlikely to be a bid to revive the HP Touchpad tablet range.

We currently have a $29.76 Trefis price estimate for HP, which is around 40% above of the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Hewlett-Packard To Shun ARM At Debut Of Microsoft Windows 8, www.bloomberg.com, June 30, 2012 []
  2. HP restarts tablet manufacturing, Bangkokpost.com, May 11, 2012  []
  3. HP Expands Converged Cloud With Microsoft Services, echannelline.com, Sep 9, 2012 []
  4. HP Releases webOS In Beta, blog.openwebosproject.org, Aug 2012 []
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