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HP Stock: Here’s Why the Firm is Struggling

Posted On November 28, 2017 2:32 pm
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Hewlett Packard Enterprise Co(NYSE:HPE) is having a bad year. HP stock is down over 43% year-to-date. Share prices are also plummeting after the company’s long time CEO Meg Whitman announced her plans to leave the company. Whitman was the symbol of change and hope at the struggling company as she was striving to turnaround HPE.

HP recently posted a lower-than-expected quarterly report. The only segment which posted better financial results was networking. But the company stands no chance of dominating that market, because the sector is already covered overwhelmingly by giants like Cisco and Arista Networks.

HP has lost a lot of its valuable assets while trying to adapt a minimal strategy to increase focus. The company sold its software business to Micro Focus. Analysts think that HP management should not have sold the software business, as it could have given the company some much-needed growth catalysts.  The transaction brought in about $8.8 billion in cash and stock for HP, but operating without a software business means constant damage to the company’s margins and operating cash flow. In the fourth quarter, HP’s product gross margin came in at 29.7%, down from 31.8% recorded in the fourth quarter of 2016.

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HP’s revenues are declining because of constantly increasing memory (DRAM and NAND) prices. Most of the hardware products made by HP have memory chips in them. Analysts think that had HP not sold its software business, the company would have higher chances of offsetting its losses by launching newer, more innovative software products. This sale was Meg Whitman’s blunder. The company will continue to suffer for years to come because of this decision.

After software, the company is left with only two major segments: enterprise and financial services. The enterprise segment, which has been the central point of investors’ hopes, is not doing well. In the fourth quarter, servers revenue declined by 5%. HP’s servers business is having a tough time because of IBM, Dell and Cisco.

HP is also suffering in the storage business. The company is struggling because companies are now preferring “hyperconverged” infrastructure. In this industry, San Jose-based company Nutanix is the market leader. HPis trying to catch up. The company bought SimpliVity for $650 million. SimpliVity makes hyper-converged solutions for the Enterprise.

How well these new enterprise initiatives will work remains to be seen. However, the big picture remains, and without the potential for new software development, HP stock isn’t a promising option for the long haul.

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