Hewlett-Packard (NASDAQ:HPQ) continues to reel due to the secular decline in PC hardware industry. It exited the tablet market in 2011, due to poor returns and stiff competition from Apple, Samsung and Google. However, the recent surge in tablet sales has forced it to re-enter the tablet space to bolster its flagging PC hardware division. On Thursday, September 19, HP announced the launch of three Windows 8 hybrids with detachable touch screens, one Windows 8 tablet, and four Android tablets for the U.S. market.  Furthermore, it unveiled the world’s first notebook PC with integrated Leap Motion™ technology, which is slated to start selling in October. While we are concerned that the decline in PC sales will affect HP’s top line going forward, we expect these launches to help arrest decline in its PC shipments.
PC And Workstations Division Is Reeling From Declining Shipments
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HP’s PC and Workstation division is the fourth largest division, which contributes 29% to its revenue and makes up 14% of its estimated value. According to IDC, HP posted a 8% decline in shipments in Q2 2013.  We expect the decline in the global PC market to continue and HP’s shipments to decline further. We have factored in this decline in our price estimate and expect the market share to continue to shrink to 11.3% by the end our forecast period.
However, the decline will not affect our valuation for HP substantially as the company derives 71% of its value from other divisions such as services, printers, and server & storage. Even if HP’s PC market share were to fall at a faster rate, the bottom line would not be impacted significantly.
A Rundown On New Devices And Services
HP unveiled a suite of hardware and services on Thursday, September 19. The new launches include the following:
- HP Spectre 13×2: A hybrid between notebook and tablet that uses Intel’s 4th generation processor to run Windows 8.
- HP Envy Leap Motion Special edition: A laptop that will incorporate Leap Motion’s gesture technology to improve the user’s PC experience and aid in contactless interaction with digital content.
- Tablets with different form factors and operating system: Slate tablets that will be available in different screen sizes from 7 inches to 10 inches.
- Services such as HP Connected Photo App and HP Connected Music, which provides seamless access to photos and music from devices or social media sites like Facebook in one location.
New Launches To Bolster Sales
HP is set to sell HP Envy, which is embedded with Leap Motion’s technology, in the third week of October. If HP can market Leap Motion technology on its PCs successfully, it might lead to a slower decline in HP’s market share. Moreover, as this will be a value-added feature to HP’s existing product line, HP plans to sell this Laptop for a higher price, at $1,050. This can translate into better EBITDA margins for HP. We currently estimate the company’s EBITDA margin to decline from 8.2% in 2012 to 7% by the end of our forecast period. If this move is successful and many early adopters for this technology emerge, HP’s margins can rise beyond the 2012 EBITDA levels.
By launching a plethora of hybrid tablets, HP is trying out every possible combination of Android and Windows 8 hybrid devices. HP hopes that with these launches it will be able to win over some customers from the incumbents such as Apple and Samsung. The hybrid Slate tablets are expected to go on sale in November. The successful launch of these hybrid tablets is important for HP as it not only addresses one of the biggest emerging opportunities in the hardware space, but also fills the missing product offering in its product portfolio.
With Spectre, HP is targeting business clients who have higher spending power and want the convenience of a powerful PC and tablet. The company has priced this product at a premium, which can lift HP’s margins if the sales gains traction. Through the launch of Slate, HP is targeting the price sensitive customers in emerging economies. IDC has predicted that mini tablets (sub-8 inch screens) will account for as much as 60% of the tablet units shipped in 2013.  We, therefore, believe that HP’s Slate tablet will be able to capture a sizable chunk of this growing tablet segment and drive revenue growth going ahead.
We currently have $18 price estimate for HP, which is approximately 15% below the current market price.Notes:
- HP Delivers Dynamic Holiday Portfolio with Industry-first Innovations, September 19 2013, www.hp.com [↩]
- Lenovo Overtakes HP as the Top PC Vendor While U.S. Shipments Stabilize in the Second Quarter of 2013, July 10 2013, www.idc.com [↩]
- IDC Forecasts Worldwide Tablet Shipments to Surpass Portable PC Shipments in 2013, May 28 2013, www.idc.com [↩]