Hewlett-Packard Watchers Fret R&D Shift

"Just to do a single microprocessor is several hundred million dollars a year of R&D," says Robison. "Software engineers don't require big fabs, and lots of hardware and all the prototypes."

In other words, says Robison, H-P is booking revenue from both hardware and software, yet investing primarily on the software side. That makes it appear as if the company is underfunding R&D as a percentage of total revenue, while H-P is in fact getting tremendous leverage from its investment, he says.

Related initiatives such as the three-year-old intellectual property licensing group enable H-P to milk even more benefits from its R&D investment, through royalties and patent swaps with other companies.

The approach doesn't seem to be hurting H-P's standing so far.

Whither the Growth?

Last week, industry research firms Gartner and IDC announced that H-P had widened its recently captured lead over Dell(DELL Quote) as the world's No.1 PC maker in the fourth quarter of 2006.

But markets eventually get saturated, says Monetta Fund portfolio manager Bob Bacarella, who wonders where the company's next growth opportunities will come from without the kind of innovation pipeline that typically comes from scaling R&D investment with revenue.

"It gives me pause from wanting to be more aggressive with the stock," says Bacarella, who doesn't own shares of H-P.