HP’s Markets Are Declining Despite Growth Initiatives and It Doesn’t Have a Moat

Business Strategy & Outlook

The HP to remain a leader in the personal computer and printing markets but these markets are facing challenging long-term growth prospects. Industry shifts toward using mobile devices as computer supplements or replacements and fewer printing tasks being performed for economic and environmental reasons may create headwinds for HP. The HP’s growth initiatives will expand its market share within the PC and printing industries as consolidation occurs, but the cost competitiveness among the remaining vendors to limit potential upside. The personal computer purchases will contract as more households primarily use smartphones for computing tasks and as cloud-based software upgrades can delay the impetus to upgrade computer hardware. HP’s personal systems business, containing notebooks, desktops, and workstations, yields a narrow operating margin that one cannot foresee expanding. The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. Contractual service offerings like HP’s DaaS are alluring to businesses since IT teams can offload hardware management, receive analytics to proactively mitigate computer issues, and pay monthly instead of facing unpredictable large capital expenditures.

HP’s push toward contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing. HP is combating the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but the competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is a late entrant, its movement into printing metals could cause customer adoption. The printing market is the overall trend of screen reading replacing printed pages, and one cannot believe HP’s initiatives can offset the macro trend.

Financial Strengths

The HP’s solid balance of cash and equivalents and its ability to generate free cash flow as indicators of a financially secure firm. As of the end of the fiscal 2021, the company had $4.3 billion in cash and equivalents and $7.5 billion in total debt. The HP’s leverage to decrease as retained earnings increase and the company pays off debt on schedule. HP spends about 8%-9% of its revenue on SG&A and about 2%-3% of its revenue on R&D, and the expenditure trends to remain consistent. The company’s yearly dividend has increased year-over-year since fiscal 2016, and a modest dividend increase annually. HP has a solid track record of repurchasing shares, and the company will continue to invest in buybacks. Additionally, as part of thwarting Xerox’s 2020 takeover attempt, HP targeted $16 billion in shareholder returns, with the majority being share repurchases. The company’s strategy regarding its pension plan funding is to commit at least the minimum contribution required by the respective local authorities. At the end of fiscal 2020, the defined benefit plans and post-retirement plan were underfunded by $1.6 billion. One cannot see HP’s benefit payment schedule as a hinderance to operations and posit that HP should be able to properly invest in growth opportunities while supporting its benefit plan obligations.

Bulls Say

Expected challenges within the printing and PCs markets may be overstated. Enterprises adopting managed print services and Device-as-a-Service over hardware purchases could expand HP’s margins.

HP’s innovation in notebooks and tablets could moderate concerns about a lengthening computer upgrade cycle. With an invigorated brand, HP is making inroads with premium and gaming PC buyers.

Existing 3D and A3 vendors could be disrupted via HP’s scale. HP’s 3D materials open platform could make HP the preferred choice while offering A3 products opens up a $55 billion market.

Company Description

HP Incorporated is a leading provider of computers, printers, and printer supplies. The company’s mains segments are personal systems and printing. Its personal systems segment contains notebooks, desktops, and workstations. Its printing segment contains supplies, consumer hardware, and commercial hardware. In 2015, Hewlett-Packard was separated into HP Incorporated and Hewlett Packard Enterprise and the Palo Alto, California-based HP Incorporated sells on a global scale.

(Source: Morningstar)

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