In a recent release by market research firm IDC, IBM led the worldwide server market in Q2’11 with a 30.5% market share, topping HP (NYSE:HPQ) which fell to the second position [1] after its market share dropped to 29.8% – down 1.7 percentage points from Q1’11. Other big players in the server market - Dell (NASDAQ:DELL), Oracle (NASDAQ:ORCL) and Fujitsu (PINK:FJTSF) – placed 3rd, 4th and 5th respectively.
While the fall in HP’s server share is modest, it serves a reminder of the volatility of the hardware business. In addition to facing competition from the likes of IBM, HP faces an industry that may tighten the purse strings over the next few quarters as a result of weak macroeconomic outlook. Unfortunately for HP shareholders, the company would could be more negatively impacted than IBM from industry-wide server demand weakness due to the larger relative contribution of servers to HP’s value.
Server Hardware Business More Important to HP than IBM
HP’s server business, which includes industry standard servers and high-end servers, contributes almost 13% to our $42 Trefis price estimate for HP’s stock. In comparison, we estimate that IBM’s server business accounts for less than 1% of the $199 Trefis price estimate for IBM’s stock.
Bleak Macroeconomic Outlook Could Hurt Server Market
Factory revenue in the worldwide server market rose by 17.9% year-on-year, raking in $13.2 billion in the second quarter of 2011 as server unit shipments increased 8.5% year over year to 2.1 million units – the second highest quarterly total ever reported in the second calendar quarter of any year. [2]
We currently forecast that HP’s industry server shipments will increase from an estimated 2.8 million in 2010 to over 3.2 million by the end our forecast period. However, according to IDC, 2Q11 was an exceptionally strong quarter and weakening macroeconomic conditions around the world will likely moderate demand for new servers later this year.
In addition to this, if HP continues to lose share in the server market, its server shipments could actually decline over the forecast period resulting in a measurable downside to our $42 Trefis price estimate for HP.
Server Challenges Highlight Business Appeal of Software to HP
HP last week gave indications of spinning off its PC business in the near future as it now looks to transform more into a software and services firm, aping IBM. (See HP Looks to Spin Off PC Business & Bid for Autonomy) We also recently highlighted how this strategy may eventually lead to HP considering a spin off of the lucrative printer business as well. (See Will HP’s Printer Business Be Spun Off After PCs?)
The battle to retain market share in hardware product markets (PCs, servers, mobile phones) where the competition can be fierce and the margins relatively slim, highlights why companies like HP are increasingly interested in transforming themselves into software and services businesses. The enterprise software business is attractive due to higher customer stickiness, more predictable licensing revenues and fatter profit margins. Combine this with services where you can help clients to customize their software and support their implementations, and you have the potential to grow the bottom line faster than you would in the hardware business.
See our full analysis of HP stock here
Notes:- IDC reports that IBM & HP are in a statistical tie for the number 1 spot despite the slight difference in market share. [↩]
- Worldwide Server Market Revenues Increase 12.1% in First Quarter as Market Demand Continues to Improve, IDC [↩]
