2. Late entrance into mobile makes for uphill battle
Whitman has said that HP plans to offer a smartphone. Google Inc (NASDAQ:GOOG)’s Android and Apple Inc. (NASDAQ:AAPL)’s iOS have a combined 90% market share in the U.S. BlackBerry, the former Research in Motion, and Microsoft Corporation (NASDAQ:MSFT) control almost the entire remaining 10%. (I’ve not ruled BlackBerry down for the count. Its execution has been poor, but there’s at least a small market for its phones due to the security element. We’ll see how the Z10 does in the U.S.) There’s also buzz that Amazon.com, Inc. (NASDAQ:AMZN) might enter the space. We all know Amazon’s MO – its phones would likely be sold at about cost.
The smartphone market in the U.S. is quite saturated — more than 50% of all activated mobile phones are smartphones. Those eager for one already have one, if they can afford one. Those remaining don’t believe they need one or can’t afford one. These are not desirable groups to target. The former will need the mix of a good price combined with yet-to-exist features to be sold. Some in the latter category will only be sold on price. So, HP needs to offer a compelling reason why people should switch from their current smartphones. That’s a tall order given how entrenched many are in their favored ecosystem.
Globally, markets such as China and other emerging markets are far from saturated. However, HP still faces the formidable Google-Apple competition.
3. Enterprise services segment stuck in Catch-22
HP’s IT business is essentially the former EDS, which it acquired in 2008 for $13.9 billion and for which it took an $8 billion impairment charge last August. This business accounted for 21% of HP’s revenue in its most recent quarter. Its non-GAAP operating margin was 1.3%. Again, IBM’s competing segments had 19.2% (tech services) and 17.2% (business services) margins in 2012, and Accenture’s operating margin was 14.1%.
There are likely a few reason why HP is getting hammered on margins, but surely one is some businesses are hesitant to contract with a company that’s future is uncertain. The safer bets are to go with others, such as IBM or Accenture, which I highlighted recently in “Are There Irish Stocks That Could Keep the St. Patrick’s Day Celebration Going?” We all know IBM always ranks at the top of various “best brands” and “best places to work” lists. Accenture’s star has been rising in this respect; for instance, Accenture has been named to Fortune Magazine’s 2013 “100 Best Companies to Work For” list for the fifth consecutive year.
So, HP likely has to “buy” some business. This hurts the bottom line. Thus, the circular Catch-22. Whitman is no doubt working on this issue, but, like most Catch-22s, it’s going to be very difficult to fix. Investors and potential investors should keep their eyes on progress here.
The Foolish bottom line
HP is not a stock for most long-term individual investors; it’s better suited to speculators with higher-risk tolerances who are willing to follow the twists and turns of a turnaround. HP has a solid brand name in some corners, top R&D talent, and the extremely capable Meg Whitman at the helm. However, it seems the long-term odds are against HP given the amount of damage done under previous CEOs and the length of time it slumbered (and went on foolish buying binges) while competitors raced ahead with commercially-successful innovations.
The article This Stock Rose 67% in the First Quarter originally appeared on Fool.com is written by BA McKenna.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
