At Meg Whitman's HP, Hope Springs Eternal

NEW YORK ( TheStreet) -- Hewlett-Packard ( HPQ) is a company investors want badly to love.

At its current market capitalization of more than $43 billion, you're still getting nearly $3 in annual revenue for each $1 of equity. That's the reverse of the normal tech company ratio. Microsoft ( MSFT) is valued at more than three times sales.

The problem for HP is that it's barely profitable and not growing. By holding down costs CEO Meg Whitman has managed to eke out profits for the last three quarters, reaching 5% of sales for the quarter ending in July, but its numbers still look more like those of an old-line manufacturer than a tech company.

Whitman has held the line by cutting staff: 28,000 so far and more to come. Like Yahoo! ( YHOO) did before, she's testing loyalty by forcing workers to come to the office.

Whitman has also firmed up the balance sheet. Debt is down about $8 billion over the last year, and free cash flow for the first three quarters came to $7 billion.

This is why hope springs eternal. Simply by saying she thinks her turnaround is taking hold at this week's analyst meeting, Whitman caused the share price to rise nearly 10% in one day. The shares are up nearly 60% so far this year, one of the best performances among big cap stocks. But apparently not enough to keep it in the Dow 30.

I have been a long-term bear on HP, but I've recently let up on it due to valuation and some recent moves. Hiring Bill Hilf, an open source advocate who ran the Azure cloud, from Microsoft, is a good move. Incorporating Leap Motion's gesture interface into its laptops is a good move.

The question is, are these enough to move the needle, to create organic growth and raise profit margins? It's hard to see that with Whitman insisting, at the same analyst meeting, that Microsoft is now her competitor rather than her partner.

And she's right about Microsoft. There's no longer a divide between hardware and software, or hardware and services.

Any company with cash, like Microsoft and especially like Amazon.com ( AMZN), can become a hardware player by simply ordering a design made by a collection of Chinese OEMs, all of which are anxious to take elements of those designs and steal that share for themselves.

Tech companies no longer have channels; they are channels. The way HP sells its products, by placing them in stores, is obsolete in the consumer space. HP is becoming an enterprise player, with the former EDS sales force competing directly with IBM ( IBM), Microsoft and Oracle ( ORCL) for huge orders. The company's one market-leading product, printers, are becoming obsolete in a device-oriented age.

Whitman talks a lot these days about "converged infrastructure," combining servers, storage, networking and management software in a single solution. Sounds great. But it's still just a way to keep corporate managers buying data centers, when the big market move is to cloud, which is rented.

All of which brings us to HP Cloud. HP is doing just what AT&T ( T) is doing with its cloud: depending on resellers. That may work, but it's in a very competitive market, one where it can't match prices with Amazon, where it doesn't have the cloud experience of IBM or Microsoft, and where it can't tie customers in with other services like the carriers.

The biggest problem for HP is that it doesn't own any technology that customers must have. IBM owns mainframes, Microsoft owns Windows, Apple owns devices, Google ( GOOG) owns services and Amazon.com has its cloud. Even Oracle owns the database space. The only niche HP owns is printers, and that's not going to get it done.

All the financial engineering in the world, all the happy talk to analysts, all the reorganizations, layoffs and spirit in the world, won't matter if HP can't create something new that customers really have to have.

Whitman told the analyst meeting that the cutting will be over next year, and that growth will return the year after that. If she can deliver, then HP may be selling at par with sales and its market cap could triple.

But as of this writing, that's still speculation. And as HP regains its health it becomes increasingly vulnerable to a takeout by an outfit selling at a premium to sales. Apple now has 10 times HP's market cap. Microsoft has more than six times its market cap. IBM has five times its market cap, and Oracle has more than three times its market cap.

A healthier HP may be a tempting acquisition target. Good for Whitman, good for shareholders, great for speculators. But not the future the CEO is presently selling.

At the time of publication, the author owned shares of GOOG, AAPL, IBM and YHOO.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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