After Tablets, HP Eyes The Smartphone Space To Boost Revenues

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Hewlett-Packard (NYSE:HPQ) exited the smartphone and tablet space precipitously in 2011 due to a poorly executed entry in each market.  And since, Apple, Samsung and Google have competed effectively in establishing formidable markets positions as well. However, rumor has it that HP is set to re-launch two low priced smartphones in the coming days. The Information website, citing unnamed sources, said that HP is launching smartphones that would be aimed at emerging markets such as India and China.

In the past few years, smart phone market has witnessed exponential growth, while the PC sales have slumped. By launching a smartphone, HP is following in the footsteps of PC giants Lenovo, which re-entered smartphone market in 2012 and is now among the top five smartphone manufacturers in the world. [1] By launching smartphone, HP is trying to bolster its flagging PC hardware division. In this article, we will explore HP’s target market and the how much revenue HP can make through this foray.

See our full analysis on HP

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Sizing The Smartphone Market in Emerging Countries

Global smartphone shipments are on the rise and set to surpass one billion unit mark this year. [2] High smartphone growth is the result of a variety of factors including steep device subsidies from carriers, especially in developed countries, as well as a growing array of sub-$200 smart phones. Additionally, IDC forecasts smartphone shipments will grow to 2.3 billion by 2017.

Emerging countries include over 85% of the world population, and contribute almost three quarters of global GDP growth, according to Fidelity Investment Ltd. [3] Unlike developed countries where smartphone penetration is above 50%, it is below 25% in many developing countries. While majority of the population in these countries are below poverty line, the elite and aspiring middle class make up nearly 20% of the population. However, as economic development gains traction in these countries, many households are expected to move to higher income bracket in the future. For example, India’s middle class has 250 million people, which is expected to grow to 600 million by 2030, according to Deutsche Bank research. [4] We believe that as purchasing power in developing countries improves, discretionary spending will rise as disposable income grows, which will fuel demand for luxury items such as smartphones.

While the adoption of smartphones in developed countries fueled the first wave of global growth, strong demand in emerging markets, especially Brazil, Russia, India and China (BRIC), will drive the next phase. According to IDC, smartphones shipments are expected to surpass the total shipments to developed markets by 2014, and cross 1.5 billion mark by 2017. The emerging markets are expected to grow at a compound annual growth rate (CAGR) of 17% over the 2012-2017 forecast period, compared to the 7% CAGR expected in developed markets. [5] The sale of sub-$200 smartphones is prevalent in these countries, and we believe with the availability of cheaper options, the smartphone penetration can rise.

HP’s Smartphone To Bolster Revenues

HP plans to launch two sub-$200 smartphones, which are aimed at users from the emerging countries. The successful launch of smartphone 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.

HP’s PC and Workstation division is the fourth largest division, which contributes 30% to its revenue and makes up almost 10% of its estimated value by our estimates. HP’s PC shipments have been flat year-over-year in 2013. But the average selling price (ASP) of PC is declining. As a result, the revenues for the company have suffered. We expect HP’s revenues for its hardware division (PC division) to get a boost from smartphone sales. If HP were to capture only 1% of the expected smartphone shipments share, it can sell nearly 15 million phones. This could translate to around $3 billion in revenues and $150 million (at EBITDA margins of 5%) in EBITDA for HP.

We currently have a near $22.96 price estimate for HP, which is ~20% below of the current market price.

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Notes:
  1. Record Smartphone Shipments Grow the Market 38.8% in the Third Quarter of 2013, October 23 2013, www.idc.com []
  2. Worldwide Mobile Phone Market Forecast to Grow 7.3% in 2013 Driven by 1 Billion Smartphone Shipments, September 4 2013, www.idc.com []
  3. Emerging markets insight []
  4. The middle class in India, www.dbresearch.de []
  5. Smart Connected Devices in Emerging Markets to Surpass 1 Billion Unit Shipments by 2014 with More Than 60% Going to BRIC Countries, June 10 2013, www.idc.com []