Windows 8 Will Show HP's True Weakness

There has been talk about the death of PC for quite some time now, and with the rising popularity of mobile technology, this only makes sense. PC sales increased in Europe and few other regions during the last quarter. Sales were still weak in general, however, and Hewlett-Packard (HPQ) lost more market share. While some believe that the upcoming launch of Microsoft's (MSFT) Windows 8 could bolster sales, it is important to note that this will be temporary. The stock has dropped significantly from the price before the Windows 7 release, and the improving mobile market will shake things up even more. As Hewlett-Packard is struggling with sales, it needs a boost from Windows 8, and although Windows 8 will be more connected to Windows Phone products, these are not such popular products yet. Coupling this with the increasing popularity of mobile products in recent reports, things do not look very promising for HP and the PC market.

Hewlett-Packard is currently trading around $19, and it has been dropping rather steadily since the late part of February (with a brief bump up this month). It has revenue growth of -2.97% and earnings per share (TTM) of $2.63. Microsoft, on the other hand, has revenue growth of 3.98% and earnings per share of $2.00 - not to mention some new projects that take the pressure off of PC sales to drive revenue.

PC sales rose 9.1% in the second quarter for the Europe, Middle East, and Africa region, but this did not apply to all PC companies and was not consistent with sales numbers in other countries. Acer did particularly well, recovering for last year's difficulties and accounting for much of the success in this region. By comparison, Hewlett-Packard lost market share despite retaining the spot as the top seller. Despite the way this news appears good for the PC industry, it is mostly just good news for Acer.

In the United States, PC shipments dropped rather dramatically, falling 10.6% from a year ago. All of this balances out fairly well, however, as worldwide shipments remained roughly even from a year earlier. PCs are still falling out of favor though, as Hewlett-Packard and Dell (DELL) both saw drops in U.S. sales. In fact, Apple (AAPL) was the only major manufacturer that reported increased U.S. computer sales during the second quarter. Macs appear to be winning the battle between Macs and PC, which is bad news for Hewlett-Packard and Dell.

Dell has revenue growth of -3.96% and earnings per share of $1.75. Again, I'll compare that to a much healthier company (Apple) which has revenue growth of 58.86% and earnings per share of $41.02.

While the July 22, 2009 launch date of Windows 7 appeared to coincide with great rises in Hewlett-Packard stock, I do not think we can expect as significant of an impact this time around. The stock is much weaker now than it was in 2009, trading at a price over $10 below the low price back then. Furthermore, sales were already increasing in March 2009, which does not match the continued drop we are witnessing in Hewlett-Packard stock right now. This does not mean the fall release of Windows 8 will not help the PC industry, but it will not be as significant as in years past. Try this on for size: Windows 8's price is 33% of what Windows 7 was ($40, compared to $120 - which was down from the previous Windows releases). Microsoft knows it can't sell its platform for anything over $100 now, and apparently not even for $50.

Windows 8 will reduce the difference between the user interface for PCs and Windows phones, making the PC more like the mobile product. This move makes some sense, as it tries to make PCs a more connected part of this family of products, but Macs will be doing this as well. Apple is releasing its new Mountain Lion OS, which brings the experience of iPhones and iPads to the Mac.

The problem is not that Apple is moving first, but that fewer people will care about the connection between PCs and Windows Phone products. The Windows Phone OS remains quite weak when it comes to smartphone market share, and while this may change in the future, it will not have an impact on sales for some time to come. Windows Phone has lost market share over the past year, dropping to 1.9%, while Google's (GOOG) Android has risen to 56.1% and iOS has jumped to 22.9%. Following the Windows Phone user interface, therefore, will not be drawing in a large number of smartphone users, and Hewlett-Packard will continue to struggle with competition from the mobile market.

The mobile market is continuing to take over quickly as well, drawing attention from a variety of areas in the industry. Smartphones and tablets continue to be the most in-demand products for the customers. They are appealing to advertisers as well, as a recent study has shown that mobile users frequently take action after engaging with an ad on their device. Schools are also jumping on board, as iPads were a bigger seller in schools than Macs this last quarter, and this has led to the best sales in the education market it has ever had. Mobile products are becoming popular in more and more places, and there is no real sign of slowing down.

This will only add to the issues Hewlett-Packard is already facing, as PCs have no real way to compete with this, especially with the small market share held by Windows Phone. Unless they can be connected better to a popular mobile device, I do not think Hewlett-Packard or any other PC company has much chance against mobile products.

Perhaps this is why HP has turned to Gram, the least it could surmise from its ill-advised $1.2 billion acquisition of Palm. It remains to be seen what Gram can do for the company, but Palm faded fast and few have opened the doors for a similar new product. Hopefully, HP knows this, but we'll have to see.

There are those that recommend buying HP as it's current price level really can't sink too much further. There are different some positive indicators - a large market cap, a new CEO who hasn't seen a full quarter of numbers yet, a large $8 billion write down - for example. But I have to wonder what on the pipeline could save HP. If Microsoft no longer seems so confident with Windows, what good can it do for HP. I don't see much upside, and a small increase in European PC sales surely can't keep HP profitable for much longer - and if it did, not nearly at levels it once was.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: http://seekingalpha.com/article/814081-windows-8-will-show-hp-s-true-weakness?source=feed

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