Scenarios That Can Significantly Impact Hewlett-Packard’s Stock Price – Part 2

-35.04%
Downside
29.94
Market
19.45
Trefis
HPQ: Hewlett logo
HPQ
Hewlett

In the previous note, we explored the base case scenario for Hewlett-Packard (NASDAQ:HPQ). Tepid business environment, price competition and secular downtrend in some of the industries have forced the company to rethink its strategies for various divisions. For the bull case scenario, Trefis considers that new product and service launch in various industries can help HP to gain market share and improve topline in the coming months. In this note we explore the bull case scenario for the company in detail.

See our full analysis on HP

Bull Case Scenario: Upside of 18%

Relevant Articles
  1. Up 5% In A Fortnight, Can HP Inc. Stock Continue Outperforming The Market?
  2. What’s Next For HP Inc. Stock After Dropping 5% Last Week?
  3. Buy HP Inc. Stock For 25% Upside?
  4. Has HP Inc. Stock Peaked At $17?
  5. Here’s Why Hewlett-Packard’s Stock Could Touch $10
  6. Why Did HP’s Stock Price Grow 60% Between 2016 And 2018?

In the bull case scenario, Trefis estimates that there is 18% upside to its stock price estimate. The expected change to drivers is as below:

Imaging And Printing Division: – Over the past few years, the secular decline in printer industry has affected the participants in the market. However, pent-up demand for new printers remain due to legacy hardware. In the bull case scenario, Trefis projects that the worldwide printer market will increase to 120 million units by 2021 due to pent up demand for printers and increases in printing demand across most regions and industries. Furthermore, due to HP’s brand image, it can increase its market share to 45% by 2021 as smaller competitors (like Lexmark) exit from unprofitable ventures.

In addition to leading the printer hardware market, HP leads the ink and supplies industry through continuous innovation in ink technology. It is manufacturing cartridges that last longer and, therefore, are pricier. Trefis believes that as the company continues to innovate in the ink and supplies vertical, the average sales price (ASP) for supplies can be higher. In the bull case scenario, Trefis estimates that the printer ink and toner supplies ASP could increase to $55.40 by 2021.

Enterprise Server, Storage And Networking Division: – Within this division, servers contribute 70% to the top-line and bottom-line. As a result, the drivers associated with server unit have most impact on the valuation of HP. In the bull case scenario, Trefis estimates that HP’s server shipments could increase to 3.7 million as it continues to launch servers with high computing abilities. Furthermore, as HP adds more functionality to its servers (especially for Data-center centric capabilities), Trefis estimates that prices for its server would decline at a slower pace to $3,790

For the storage unit, HP’s revenues have flat-lined over the past couple of years after peaking at $4.2 billion in 2012. However, as investment in data center is rampant, Trefis believes that storage requirements from IaaS and Cloud can push HP’s storage revenues to $4 billion by 2021.

HP Services: – HP’s services division, which includes Infrastructure outsourcing, Technology services and Application and business outsourcing, has witnessed a decline in revenues due to key account runoff, tepid business signings and intense competition from other players. While we have discussed our projections for the base case scenario earlier, in bull case we have considered that improving business condition would improve new signings and thus the revenues. Trefis estimates that Infrastructure outsourcing revenues would increase to $12.9 billion, while tech services, and application and business outsourcing revenues would increase to $9 billion each. This expected increase in revenue contributes 3% to the 18% upside in stock price.

Personal Systems Group: – Personal Systems group contributes 30% to the total revenues and 15% to HP’s estimated stock value. The disparity between revenue contribution and value can be explained due to low profit margins for the segment. HP manufactures laptops and desktops that compete in the highly commoditized computer industry. As a result, margins for the company and industry in general are low.

In the bull case, Trefis estimates that worldwide demand for laptops would improve to 222 million. Furthermore, HP’s market share in the notebook and laptop market would improve to 22% by 2021 as it undercuts competitors in capabilities. A functionally superior laptop would also help the company to cut its prices at a slower rate, and Trefis estimates that price will decline at a slower rate to $500 by 2021.

Desktop industry has been in a secular decline over the past three years. Most of the demand in desktop market is driven by enterprise clients. While the demand for desktop will continue to decline over the project time frame, Trefis estimates that desktop markets can stabilize at 112 million by 2021. Since HP has ongoing client relations with most of its enterprise clients, it can increase its market share in the shrinking desktop industry to 22.7% by 2021. Furthermore, by adding more features (such as Gesture recognition) to its desktop, it can charge a premium for its desktop. This would help the company to stem the decline in its desktop price to $400 by 2021.

HP Software Division: – HP offers IT management software solutions, including support and professional services allowing clients to manage their IT infrastructure and applications. Other offerings include Information management and open call solutions that allow clients to develop and deploy voice and data network services. The revenues for this division have been stable at $4 billion. In bull case, Trefis estimates that License revenues would decline to $1 billion due to decrease in demand for HP’s other services such as Infrastructure outsourcing and Application and process outsourcing. This would also impact the renewal rate negatively, which reflects the repeat business from existing clients, to 88% by 2021.

See The Bull Case Scenario For HP

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

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research