Dell and Hewlett-Packard Are Cheap for Good Reason
Dell (symbol DELL) and Hewlett-Packard (HPQ) once made fortunes for their shareholders. But lately the technology giants’ stocks have done nothing but slide. Dell shares, $18 last February, fetched $11 on September 7. HP sold for as much as $55 in 2010 and now goes for $17. (Their all-time highs, set in 2000 at the peak of the tech bubble, were $55 and $69, respectively.)
Is it time for bargain hunters to buy the stocks? Not yet—and maybe not ever. Analysts say that HP, the world’s largest maker of PCs and printers, and Dell, number three in PCs, are struggling with internal problems (HP has gone through three CEOs in less than three years) and external headwinds that will require time and skill to negotiate. Both firms are also scrambling to remake their businesses. “Dell and HP suffer from too much PC exposure and [new] businesses trying to get on track,” says UBS Securities analyst Steven Milunovich. “While Dell is in significant pain today given its high PC exposure, we worry that HP will be more of a slow bleed.” Milunovich is neutral on Dell and says to sell HP.
The biggest obstacle Dell and HP face is the changing nature of personal computing. As people do more tasks on tablets and smart phones, they have less need for PCs. Meanwhile, instead of storing files, photos and music on a PC’s hard drive, consumers are increasingly using “the cloud”—those amorphous information networks that let you access your data from anyplace on the globe and from virtually any electronic device.
That shift has turned these darlings of the desktop into dinosaurs that must either evolve or die. Although both companies are shifting into higher-growth ventures, including cloud computing and providing network services to Web-based businesses, neither appears to have mastered the landscape. Revenues and profits are declining, and managers at both companies have told analysts that turnarounds are not imminent. “Both companies are arguably in the third year of a five-year transformation,” says analyst Brent Bracelin, of Pacific Crest Securities in Portland, Ore. “But the headwinds are even stronger today than when they started.”
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