Scenarios That Can Significantly Impact Hewlett-Packard’s Stock Price – Part 1

-35.04%
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HPQ: Hewlett logo
HPQ
Hewlett

Hewlett-Packard (NASDAQ:HPQ) has been restructuring its business in search of top line growth. However, the strategy HP adopted to increase its revenues has not delivered the desired results. Therefore, last year, the management announced that it was splitting the company into two entities. While HP Inc will focus on personal computer and printing operations business, HP Enterprise will focus on corporate hardware and IT services.

Nevertheless, the company continues to launch new services and products in the market. In this note, we explore the base, bull and bear case for the company. Considering the width of the company, this is a three-part note. While the first note explores the base case valuation, the subsequent articles deal with bull and bear case respectively.

See our full analysis on HP

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Key Driver For Our Base Case Valuation of $30.23

Imaging And Printing Division

The imaging and printing division is HP’s largest division and makes up 28% of its value. The key drivers for this division are the worldwide printer market, HP’s share in printer market and Printer Ink & Toner Supplies Pricing etc.

According to IDC, global demand for printers is waning and the number of units shipped has declined over the past two years. [1] However, HP is focusing on the high-end ink market and commercial hardware rather than low-end consumer hardware. As a result, its share in the hardware market has improved from 39.7% in 2013 to 40.9% in 2014. Furthermore, with the improvement in ink technology, and rise in competition from non-Original Equipment manufacturer (OEM) price of toners and cartridges is on the decline.

In the first half of 2015, HP’s newly launched LaserJet and Multifunction Printers (MFP) for the commercial segment continued to gain traction with enterprise clients. [2] Trefis estimates that HP’s market share in the printer industry would improve to 43.3% by 2021 as it launches efficient and faster printers.

Additionally, HP’s ink advantage program that targets enterprise customers has helped the company to stem the decline in printer ink & toner supplies prices. As a result, Trefis estimates that printer ink & toner supplies prices would decline at a slower rate to $45.90 by 2021.

HP Services

HP’s services division is the second largest division and makes up 22.7% of its value. The key drivers for this division are Technology Services, Infrastructure Outsourcing and Application & Business Services. Over the past few quarters, HP’s services have failed to deliver growth in the face of key account revenue run-off, softness in new signings from EMEA, and currency headwinds. We expect that the company will post a marginal improvement in service revenues even though weak business conditions in EMEA remain, and the company has not been able to bag substantial new contracts. The primary reason for this is that HP continues to report double-digit growth in revenues of its strategic enterprise services such as cloud, mobility, security and big data. [3] We believe that cloud services are potentially the biggest new revenue source for HP in 2015 and beyond. Some of the services are HP Cloud Compute, HP Cloud Object Storage and HP Cloud CDN. These services are based on pay as you go pricing. Converged cloud infrastructure built on technologies like converged storage, software-defined networking and Moonshot server that power cloud computing by seamlessly integrating big data analytics and security. It continues to work closely with its channel partners to improve their cloud go-to-market and delivery capabilities. While we expect HP’s Application & business services revenues to grow to $8.3 billion by 2021, its technology services and Infrastructure outsourcing revenues to stabilize at $8.2 billion and $11.9 billion respectively.

Server And Storage

HP’s revenues from its industry standard server segment improved by 10% in Q1 FY2015 due to double-digit increases in ISS’s ASPs as the Gen9 ProLiant server and strength in density-optimized systems. While HP continues to lead the global server market in terms of revenues Q1 2015, it is losing market share. However, HP’s Gen9 ProLiant servers are fast gaining traction amongst users and should bolster its revenues. We expect that as the company continues to launch new servers, server shipments will improve to 3.4 million. However, according to Trefis estimates, intense competition will drive average sales price down to $3466 by 2021.

HP acquired 3PAR in 2010 and the converged mid–tier storage solution from 3PAR is in high demand. In 2014, revenues from 3PAR exceeded a $1 billion run rate. We expect 3PAR converged storage solutions to drive growth in revenue at storage division in the coming years. Currently, we project storage revenues to increase to $3.7 billion by 2021.

PC Hardware Revenues

HP’s PC and workstation division is the fourth largest division, which contributes near 30% to its revenue and makes up 14% of its estimated value. Weak PC demand across the world continued to plague computer manufacturers as shipments declined. While we expect that the decline in the global PC market will continue to affect HP, we believe HP has taken some prudent steps such as the launch of new advanced thin clients at lower prices, to ensure that it maintains its market share. While we expect desktop and laptop prices to decline, PC shipments would improve due to pent up demand for laptops. We project that desktop shipments would stabilize at 23.7 million, while notebook shipment would grow to 41.9 million driven by enterprise demand for laptops. However, prices for desktop and laptops will decline to $354 and $438 respectively by 2021.

In the next notes, we explore the bull and bear case for the company.

See Our Complete Analysis For These Scenarios For HP

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Notes:
  1. Worldwide Hardcopy Peripherals Market Shows a Small Dip in the First Quarter of 2015, According to IDC, May 21 2015, www.idc.com []
  2. HP Innovation Brings Breakthrough Printing Technology to the Modern Office, March 10 2015, www.hp.com []
  3. 10-Q []