No fresh surprises from HP

The dual main business of personal systems and printers is sluggish, and the market value has shrunk significantly. The "old" HP has not had any new surprises for a long time. Hewlett-Packard, once under the spotlight for Buffett's buying spree, appears to be in new trouble.

On August 31, Hewlett-Packard (HPQ.US) announced its financial results for the third fiscal quarter of fiscal 2022 (ending on July 31). According to the announcement, in the third quarter of the fiscal year 2022, HP achieved an operating income of US$14.664 billion, a year-on-year decrease of 4.09%; net profit was US$1.119 billion, a year-on-year increase of 0.99%; adjusted net profit, not in accordance with US GAAP was $1.1 billion, down 10% from $1.2 billion in the same period last year.

Before the earnings report, analysts generally expected HP's third-quarter revenue to reach $15.63 billion and earnings per share of $1.03. More seriously, HP also lowered its full-year earnings forecast for fiscal 2022 to $4.02-$4.12 per share from $4.24-$4.38 per share, which was further exacerbated by analysts' previous forecast for this figure of $4.30. Investors worry about HP's future performance.

"Like many other companies, our revenue has been impacted by deteriorating consumer demand, which we expect to continue into the fourth quarter and possibly several more," HP CEO Enrique Lores said in an interview. quarter."

Weak terminal sales also affected HP's operational quality. At the end of the fiscal third quarter, HP's total inventory value was $8.2 billion, and inventory turnover was 56 days, an increase of 4 days compared to the same period last year.

HP's stock price began to fall as the performance was significantly lower than market expectations.

At the beginning of this year, Hewlett-Packard attracted widespread attention because of the entry of Warren Buffett. According to the data, from April 4 to April 6, 2022, Berkshire Hathaway bought 11 million shares of Hewlett-Packard Co. As of April 6, Berkshire Hathaway held a total of 120 million shares of Hewlett-Packard, with a total position value of about 4.2 billion US dollars, and a shareholding ratio of 11.4%, ranking Hewlett-Packard's largest shareholder.

According to Berkshire's holdings disclosed at the beginning of the year, as of December 31, 2021, the company did not hold shares in Hewlett-Packard. That is to say, Buffett's big purchases of HP are mainly concentrated on January 1-April 6, 2022, and the average share price of HP during this time is about $37.

After Berkshire Hathaway publicly held HP, HP’s stock price rose 15% to $41 per share the next day, the largest gain in recent years. In terms of stock market value, HP has become Buffett's tenth largest holding and the second largest technology holding position after Apple.

However, the favor of the stock gods did not make HP look good for too long. According to the financial report data, HP's net profit in the second quarter was 1 billion US dollars, a year-on-year decrease of 19%. HP's share price has continued to decline since June due to the lower-than-expected mid-year report. As of the most recent trading day, HP’s share price has fallen to $25.44, a 36% decline from the high point in early April, with a market value of only $25.6 billion.

From this calculation, Buffett's shareholding loss in HP has been close to 30%. So, why did 92-year-old Buffett favor Hewlett-Packard, which is also in his old age, and has the stock market lost his sight again?

Founded in 1938, Hewlett-Packard mainly produces and sells information products such as minicomputers, personal computers, printers, and scanners. As an old-fashioned technology company, HP has made brilliant achievements in the fields of laptops, desktops, and printers, and is also regarded as a symbol of Silicon Valley. In April 2000, HP's market value hit a peak of $155 billion.

However, HP's development has faltered in recent years due to a slowdown in global demand for consumer electronics and intensified market competition. At the same time, due to the expansion of business scope, HP's internal organization and personnel continued to expand, inevitably suffering from a serious "big enterprise disease", and missed the key layout of the mobile terminal in the first decade of this century.

In desperation, then-HP CEO Meg Whitman split the company into two companies, Hewlett Packard Enterprise (HP Enterprise) and HP Inc. Enterprise software and services business, Hewlett-Packard is mainly responsible for the computer and printer business.

According to the data, the development of Hewlett Packard Enterprise after the split is not smooth. In terms of revenue data, Hewlett Packard Enterprise’s total revenue in 2021 is $27.78 billion, which is only 55% of the same period in 2016 ($50.12 billion). As of October 13, Hewlett Packard Enterprise's total market capitalization was $16.5 billion.

Compared with Hewlett Packard Enterprise, Hewlett Packard Enterprise has developed relatively well in recent years. Data show that from 2016 to 2021, HP's total revenue increased from $48.238 billion to $63.487 billion, and net profit increased from $2.496 billion to $6.503 billion. Among them, in 2021, HP's net profit reached a new high in the past ten years.

It is not difficult to see that the revenue growth and profitability of HP after the split are in a state of gradual improvement, which should be the reason why Buffett has increased his positions. In addition, HP has long traded below 10 times earnings, while the S&P 500 averages around 20 times earnings, and Apple trades at more than 25 times earnings.

Obviously, continuous growth in performance + low valuation should be the two reasons why HP has attracted Buffett's attention. But what needs to be seen is that the substantial growth in HP's performance in 2021 is largely due to the growth of PC sales after the outbreak of the new crown epidemic and the blowout outbreak of home printing demand. But judging from the latest data, HP's two main businesses have encountered challenges and pressures.

According to the latest division, HP's main business is divided into two parts: personal systems and printers, and the ratio of the two are about 7:3. Among them, personal systems include notebook, desktop, and workstation revenue, and notebook business revenue is the segment that accounts for the largest proportion of total revenue.

In the third fiscal quarter, HP’s personal systems segment achieved revenue of $10.1 billion, down 3% year-on-year; among them, consumer business net income decreased by 20%, and commercial net income increased by 7%; in terms of shipments, HP’s total shipments decreased 25%, of which notebook shipments fell by 32%, and desktop shipments rose slightly by 1%.

Gartner's data shows that in the second quarter of this year (April-June), global PC shipments fell by 12.6% year-on-year, which is also the largest quarterly decline in the global PC market in nine years. Among them, the demand for personal computers in the United States fell by 17.5%, and the PC shipments in the Chinese market fell by 16% year-on-year.

By brand, the world's top three PC suppliers Lenovo, HP, and Dell all saw their shipments drop in the second quarter, with HP's 27.5% drop in shipments, the largest drop of any company tracked by the agency's family.

In terms of regions, HP suffered a severe setback in its North American base, with shipments down 43.5% year-on-year, and its market share fell from 32.5% in the same period last year to 22.3%, ranking second in the market, and the first place was taken by Dell (27.2%).

Industry insiders believe that relatively speaking, HP still relies on traditional retail channels to sell PC products, while Dell mainly adopts order-to-order manufacturing, has more flexible supply chain management capabilities, and has a certain low inventory advantage.

In fact, inventory pressure in the PC industry is becoming the focus of investors' attention. Data shows that as of the end of the first quarter of this year, the finished PC inventory of mainstream manufacturers such as HP, Dell, Lenovo, Acer, Asus, MSI, and Gigabyte has climbed to $14.8 billion, a 56% year-on-year increase. According to market research data, due to the continued weakness of the PC market, PC inventory continued to rise in the second quarter, which will undoubtedly further increase the sales pressure on major brand manufacturers.

The good thing is that HP remains competitive in the emerging market of India. In the second quarter of 2022, Indian PC shipments were 4.6 million units, a year-on-year increase of 12%. Although this growth rate has slowed down compared with the previous one, it is still commendable in a sluggish global market.

In terms of brands, HP (25.0%), Lenovo (21.1%), Dell (11.5%), Acer (11.3%) and Samsung (5.8%) ranked the top five in terms of shipments of PCs (including tablets) in India. HP has a 27% market share in India's commercial PC market, leveraging its local supply chain advantage.

Consumer PC demand has weakened since mid-2021, but business PC demand has remained firm. In the previous two fiscal quarters, HP's growth in commercial PCs partially offset the decline in the consumer side. However, judging from HP's third-quarter data, its commercial revenue growth rate was only 7%, a significant decline from the 18% revenue growth rate in the previous fiscal quarter. Clearly, the ongoing downturn in the global economy has also impacted demand for business computers, which is a major factor in the decline in HP's computer sales.

The latest data shows that the global PC industry is still in a period of rapid decline. On October 11, Canalys released the global PC shipment report for the third quarter of 2022, showing that global PC shipments in the third quarter were 69.4 million units, down 18% year-on-year, the largest drop in 10 years. Among them, HP shipped 12.7 million units, a year-on-year decrease of 28%, the largest decline among the top five manufacturers for two consecutive quarters.

Before the announcement of HP's financial report, the market generally had optimistic expectations for its printer business, because the revenue growth of rivals such as Canon and Xerox was still relatively stable in the second quarter.

According to the financial report data released on July 26, Canon Group achieved a turnover of 998.799 billion yen in the second quarter, a year-on-year increase of 13.3%, of which the printing business turnover was 567.5 billion yen, a year-on-year increase of 15.9%.

Canon Group said that in the field of the printing business, the market demand for office digital composite machines is gradually recovering, and the service and consumables business is flat with the same period last year; the market demand for laser printers is also relatively strong, and the business has achieved substantial growth compared with the same period last year; inkjet printers On the one hand, due to the strong global market demand, the company's sales of ink-filled high-capacity printers increased significantly year-on-year.

From the perspective of the market structure, the global printer market share is mainly concentrated in the hands of global head printer manufacturers represented by HP, Brother, and Canon, and the overall sales market share of the top five manufacturers of laser printers has reached 78.7%. According to data from the Huajing Industry Research Institute, in 2021, the global market shares of HP, Canon, and Epson will be 40%, 21%, and 18% respectively, ranking among the top three in the industry.

Therefore, the strong growth of Canon's printer business in the second quarter once made investors look forward to HP's printer business. But disappointingly, HP's printer business is far behind its rivals.

The financial report shows that HP’s printer division achieved revenue of $4.6 billion in the third fiscal quarter, down 6% year-on-year and 8% month-on-month, which was less than analysts’ expectations of $4.8 billion, and this data also hit the lowest level since the fourth quarter of 2020.

According to IDC data, the global printer market shipped 22 million units in the second quarter of 2022, down 3.9% year-on-year. Among the top five brands, Canon, Brother, and Pantum achieved positive year-on-year revenue growth, while HP and Epson experienced year-on-year declines.

By region, Asia Pacific (excluding Japan and China) and China achieved year-on-year unit growth of 7.4% and 1.0%, respectively, and the market performed relatively better than other regional markets.

In the past ten years, with the change in consumer habits and the emphasis on environmental protection issues, the number of users using printers has become less and less, and HP's printer business has been under pressure. Data show that from 2013 to 2016, HP's printer revenue fell from $23.643 billion to $18.26 billion, and the revenue shrank by 23% during the four-year period.

In November 2017, HP completed the acquisition of Samsung Electronics' printer business at a transaction price of US$1.05 billion, thereby enhancing its own printer business strength, and at the same time firming up the development strategy of the PC business and the printer business.

After the acquisition of Samsung's printer business, HP strengthened its business layout in the Asia-Pacific market, and the revenue scale once resumed growth. In 2018, HP's printer business achieved revenue of $20.805 billion, returning to above $20 billion.

However, since 2018, HP's printer business has once again faced the dilemma of sluggish growth and has been caught up in layoffs many times. From 2019 to 2021, HP's printer business achieved revenue of $20.066 billion, $17.641 billion, and $20.128 billion, respectively, which did not exceed the revenue scale of 2018.

In addition to the factor of shrinking industry scale, business model issues are also a major challenge affecting the development of HP's printer business. For a long time, HP printers have pursued the sales strategy of "selling printers at low prices and selling consumables at high prices", and late-stage consumables such as ink cartridges have always been the main source of HP's profit.

However, with the popularity of smartphones and mobile Internet, people's demand for color inkjet printers has been greatly reduced, HP continues to face the pressure of declining printing supplies business, and operating profit margins have also declined. Since then, although HP has increased the expansion of the printer service business, from the latest financial report data, HP's strategic adjustment has not achieved obvious results.

As the originator of "Silicon Valley Entrepreneurship", HP was once the most innovative and dynamic technology company in the world, and a model for China's first generation of technology companies to follow. However, judging from the latest financial report data, the short-term performance of the company's two main businesses, PC and printer, is not very satisfactory. Whether 92-year-old Buffett's investment in 84-year-old Hewlett-Packard is a good investment will take time to verify.