PALO ALTO, CA – Hewlett-Packard (NYSE:HPQ), a company once known for its innovation now seems trapped in a dying market – the personal computer. As evidence of how far the company has fallen, HP was removed as a component stock of the Dow Jones Industrial Average last week. Increasingly it is the strength of Microsoft’s (NASDAQ:MSFT) Windows operating system that drives results at HP. However, recent results have not been good as adoption of Windows 8 has floundered.
Released in October 2012, Windows 8 was meant to be a blend of traditional smart phone, tablet, and personal computer interfaces. A recent report from Gartner estimated that the global PC market shrank by nearly 11 percent in the second quarter of 2013. Even worse for HP, the company is losing ground to its Chinese rival Lenovo (HK:992) who recently surpassed HP as the number one global PC vendor based on unit shipments. HP’s year-over-year personal computer unit shipments declined by 17.4% while Lenovo’s sales increased by 18.9%.
Furthermore, HP has been in a state of almost constant turnaround and CEO Meg Whitman’s comments to shareholders in 2012 were optimistic at best, as she insisted that cost-cutting measures would free up capital that could be spent upon research and development, and ultimately, bottom line growth. However, there has been no real improvement as the company is losing share in almost every segment where they compete. Even more alarming is the poor state of R&D where the company only invests 2.6 percent of revenues as compared to more than 10 percent invested by Intel (NASDAQ:INTC) in a move to distance itself from personal computers towards mobile devices.
While the company did post $ 1.4 billion in earning for the third quarter of 2013, it also downgraded it guidance for the rest of the year and into 2014. At the same time, revenues have been slipping, and the swing towards profitability had more to do with inventory write-downs than anything else and the company has continued to trim R&D costs. Essentially the company turned a profit due to financial engineering and not the strength of its operations. While the company might appear cheap, the devil is in the details as it appears HP might be a value trap. As such, analysts are rating the company a strong sell.