HP's New Strategy: Jury's Still Out

PALO ALTO, Calif. ( TheStreet) -- HP ( HPQ) CEO Leo Apotheker has given investors his long-term strategy for the company, although the jury is still out on his plans to refocus HP on cloud services and connectivity.

Shares of HP were down 94 cents, or 2.24%, to $40.56 in pre-market trading on Tuesday, as investors digested Apotheker's plans, which were revealed Monday afternoon at San Francisco's Yerba Buena Center.
All eyes were on HP CEO Leo Apotheker when he unveiled his road map for the company.

Despite intense speculation about a possible reorganization, the new HP chief did not discuss any restructuring efforts during his keynote, instead outlining plans for a slew of cloud services, including a consumer app store and a catalog for enterprise programs and services.

Apotheker also reiterated HP's desire to invest in other high-margin areas such as software, networking and storage.

On the connectivity side, the CEO said that HP could potentially sell 100 million devices a year running the WebOS operating system. HP will soon launch its TouchPad tablet and new smartphones running WebOS, although Apotheker said that the operating system will eventually encompass PCs -- and even printers.

"We were impressed with the new CEO's long-term vision, and agree with his view on the areas where HP needs to focus in coming years," said Bill Shope, an analyst at Goldman Sachs ( GS), in a note released Tuesday. "Nevertheless, we still believe the company is underestimating the costs of its current transformation and the resulting risks to medium-term margin stability."

Shope warns that in order to shift its business to higher-margin areas, HP will have to gain share from some of Silicon Valley's biggest hitters, namely IBM ( IBM), Apple ( AAPL), Oracle ( ORCL) and even Cisco ( CSCO). "This will take opex investment, and gross margins are likely to be volatile as well," said Shope, who has a sell rating on HP's stock. "As such, HP's expectation for persistent operating margin expansion and growth appears overly optimistic."

HP investors haven't been impressed recently. The quick departure of Apotheker's predecessor Mark Hurd last year weighed heavily on the company's stock, which is down more than 20% over the last 12 months. More recently, weak second-quarter guidance impacted the company's shares as HP wrestled with weakness in its consumer PC and services businesses.

Kaushik Roy, an analyst at Wedbush Morgan, still sees upside for HP ahead. "Gaining confidence in the (relatively) new CEO will take some time and we believe that the catalyst for the HP stock would be its next earnings results in May," he explained. "We believe HP will be able to fix its near-term issues in the services segment in the next quarter or two -- near-term issues such as the China Notebook issues (that are specific to HP) have been mostly resolved and we will start to see improvement starting next quarter."

HP also noted strength in it its enterprise business during its recent first-quarter results, notably in servers, storage and networking, which could bode well for its corporate-focused cloud plans.

"We view HP as very well-positioned to deliver cloud-based infrastructure, while playing catch-up in connectivity to industry leader Apple," wrote Jayson Noland, an analyst at Robert W. Baird, in a note. "Overall, we remain buyers of HP and view upside/downside as attractive off current levels."

Apotheker did offer investors a timeline for the company's cloud strategy, promising to deliver an HP infrastructure cloud in 2011, allowing companies to access services such as storage from the tech giant's own data centers. This will be followed by platform offerings geared towards the likes of developers, he added.

"Mr. Apotheker believes cloud computing will drive the market toward HP's strengths in infrastructure," said Robert W. Baird's Noland. "We see this initiative as an attractive alternative for corporate customers looking to methodically transition to cloud computing."

--Written by James Rogers in New York.

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