Can HP Sustain Its Momentum?

Implications: HP’s good news story continues quarter after quarter.  2008 promises to be a year of increasing challenges to their good news, with Dell rebounding and the overall economic outlook gloomy.  Some day HP’s growth via market share gains and cost cutting will end.  Will that day be in 2008?

Analysis: Mark Hurd took over as CEO of HP three years ago.  He immediately started cutting costs, improving efficiencies, and releasing new products.  The results were visible within a few months, although some have claimed he simply took advantage of changes his predecessor had started.  Three years later there can be no question that HP’s continued success can be credited to Hurd.  The stock has responded well, although it is currently down somewhat in 2008.  At some point, however, the costs will be cut as far as feasible, operating efficiencies will be about as high as they can get, and the future will depend on the pipeline of new products.

HP has also benefited from Dell’s stumble.  The Dell of three years ago was plagued with questionable products and even more questionable quality.  The one-time leader appeared to have grown complacent and was ripe for a leaner and meaner HP to surpass them.  Lenovo was trying to digest their IBM PC acquisition and was hardly in a position to beat either HP or Dell. 

Dell in 2008 is no longer the lazy behemoth they were three years ago.  They too have become lean and mean, with competitive designs and quality.  They have broadened their sales channels and are competing vigorously for every bit of business.  Lenovo seems to have finally gotten their IBM acquisition under control and are now releasing products that combine the best of the IBM innovation with Lenovo’s traditional low cost.   At the same time HP also has to worry about Asus and Acer, both with dreams of growing their US and worldwide market share.

Perhaps of greatest concern is the looming economic slowdown.  Not even the best of companies can be certain of continued growth if the market overall is flattening.  HP can only grow in a flat market by taking share from their competitors, which will be increasingly difficult as those competitors become stronger. 

In the face of these obstacles, HP still raised their guidance, which suggests either they know something not evident to the public, or are simply mis-guided.  Not even the best of executives can successfully predict the economy will continue growing, so it seems a reasonable supposition that HP believes they still have enough cost cuts and efficiency improvements to support continued bottom-line gains, along with enough innovative products to ensure market share gains.  Of course, although the bulk of HP’s revenues come from the PC market, it is also important to remember their strength in services, storage and printers.  This variety of revenue sources tends to insulate them somewhat from downturns in the economy.  Increased efficiencies have given HP the ability to beef up their sales force, which helps with market share.

It appears that although HP faces a daunting set of challenges this year, they are well positioned to meet those challenges.  Some day their good news will come to an end, but to quote Aragorn from Return of the King, “…that day is not this day!”