Scenarios That Can Significantly Impact Hewlett-Packard’s Stock Price – Part 3

In the first and second parts of this three-part series, we explored the base and bull case scenario for Hewlett-Packard (NASDAQ:HPQ). The company continues to implement new strategies in the face of a tepid business environment, one characterized by price competition and secular downtrends some of its targeted markets.  Accordingly, its revenues have not increased. For the bear case scenario, Trefis considers that even with new product and service launches in various businesses, the intense competition will continue to weigh on top line and bottom line of the company. In this note we explore the bear case scenario for the company in detail.

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Bear Case Scenario: Downside of 16%

In the bear case scenario, Trefis estimates that there is 16.3% down side to its stock price valuation. The expected changes to the drivers are as follows:

Imaging And Printing Division: – As the secular decline in the printer industry persists, industry leaders in the industry will bear the brunt of flagging demand. In the bear case scenario, Trefis projects that the worldwide printer market will decline to 105 million units by 2021 due lack of demand for printers and centralized printing demand affects industry landscape in favor of managed printing services (MPS). Furthermore, it is possible that HP’s market share might decline to 40% by 2021 as competitors eat away at its share.

Furthermore, one of the key trends that have emerged in the printer supplies industry, over the past few years, has been commoditization of ink and cartridges. Many counterfeit ink cartridges manufacturers and non-Original Equipment Manufacturers (OEM) have emerged in different parts of the world. These manufacturers offer ink and cartridges at nearly 1/5^th of the price of an OEM. As a result, OEM like HP have had to reduce the cost of its cartridges. In the bear case, Trefis estimates that the average sales price (ASP) for the printer ink and toner supplies ASP could decrease to $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 bear case scenario, Trefis estimates that HP’s server shipment could decrease to 3 million. The primary reason for this could be the advent of white box (unbranded) servers that are extensively used in data centers across the world. This could also lead to price reduction for HP as it competes with these unbranded servers. Trefis estimates that prices for its server could decline to $3090 by 2021.

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, it is possible that storage revenues for the company declines as competition from companies such as EMC, NetApp, IBM, and others increases. In bear case scenario, Trefis estimates that HP’s storage revenues could decline to $3.2 billion by 2021.

HP Services: – HP’s services division, which includes Infrastructure outsourcing, Technology services and Application and business outsourcing, 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 and bull case scenario earlier, in bear case we project that expected improvement in business conditions might not culminate into new signings and revenues for HP. Trefis estimates that Infrastructure outsourcing revenues would decline to $10.8 billion, while tech services, and application and business outsourcing revenues would decrease to $7.4 billion each.

Personal Systems Group: – Personal Systems group contributes 30% to the total revenues and 15% to HP’s estimated stock value. HP manufactures laptops and desktops that compete in the highly commoditized computer industry. As a result, margins for the industry and the company suffer.

In bear case, Trefis estimates that worldwide demand for laptops would decline to 193 million. Furthermore, HP’s market share in the notebook and laptop market can decline to 18.8% by 2021 as it competitors (especially Chinese manufacturers) offer laptops at lower price points. As a result, Trefis estimates that that company might have to lower its ASP to $374 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, for bear case, desktop markets can decline to 104 million by 2021. Furthermore, competition might temper HP’s market share and price to 20.8% and $300 respectively 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. The revenues for this division have been stable at $4 billion. In bear case scenario, Trefis estimates that License revenues will improve to $1.3 billion due to increase in demand for HP’s other services such as Infrastructure outsourcing and Application and process outsourcing. This would also improve the renewal rate, which reflects the repeat business from existing clients, to 93.5% by 2021.

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