Will HP’s New Tablets Help Fuel A Recovery In Its PC Business?

Hewlett-Packard (NYSE:HPQ) exited the tablet market in 2011, due to poor returns and stiff competition from Apple, Samsung and Google. However, since then tablet sales have surged and tablets share of the smart connected devices market is growing. IDC estimates that tablet shipments will increase by 58.7% y-o-y in 2013 to 229.3 million units. ^[1] As a result, HP recently re-entered the tablet space to bolster its flagging PC hardware division. In this article, we will look at the trend in the global tablet market and HP’s tablet offerings.

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Global Tablet Market

Smart connected devices, which include tablets, smart phones and notebook PCs, are growing at a fast pace. According to IDC, worldwide shipments of smart connected devices market grew by almost 30% in 2012, primarily driven by the growing tablet sales, which saw over 60% y-o-y growth. ^[2] Additionally, worldwide tablet shipments increased by 140% y-o-y in Q1 2013. IDC has also predicts that tablet shipments will outpace entire PC market by 2015. ^[1]

Apple, with a market share of almost 40%, continues to lead the industry in the first quarter while Android still continues to dominate the tablet operating system market. While Apple and Samsung devices are very popular among users, lagging companies are facing difficulty in selling their tablets. As a result, several companies are trying to differentiate their products with with different form factors (sizes) and at lower price points to compete with the market leaders. This has led to a more fragmented tablet industry that has different sizes and prices, ranging from $100 for a 7 inch device to over $800 for the 11 inch device. IDC predicts that downward trend in prices will continue and expects that average selling price (ASP) for tablet will decline by 10% from $461 in 2012 to $381 in 2013. ^[3] We also anticipate that tablets will become more commoditized and that companies selling tablets will be plagued with lower margins going ahead.

Factors Fueling Tablet Growth

While rising Internet penetration globally is one of the main reasons for the high adoption of tablets, some of the other reasons that will fuel increase in tablet shipments are:

• Evolving technology favors tablets: SMDs are expected to drive 57% of total IT growth in the coming years. ^[4] Companies are focusing on building their cloud software and platforms as devices of the future that will run web-based cloud apps instead of native apps. Therefore, we expect more users to likely adopt tablets that require minimal storage and processing power. This change in technology is one of the biggest contributors to the growth in tablet sales.
• Demand from emerging markets: Internet penetration is increasing in emerging markets and first time users in these countries are logging onto the Internet using smart connected devices. Additionally, buyers in these countries are much more price sensitive. We expect that demand of tablets from emerging markets will drive global tablet sales as the ASP of a PC is expected to be $635 in 2013, nearly two times costlier than ASP of a tablet. ^[5]

HP’s Tablet Offering To Bolster Sales

HP recently launched two variants of its tablets. The $169 7-inch Slate Tablet that is powered by an ARM processor and runs on Android, and the $699 11.4-inch Elite-pad that is powered by an Intel Atom processor and runs on Windows 8.

Through these two offerings, HP is addressing two distinct segments. With Elite-pad HP is targeting business clients who have higher spending power, and with Slate HP is targeting the price conscious and tech savvy individual buyer. Moreover, through Slate HP is targeting the price sensitive customers in emerging economies. IDC has predicted that mini tablets (sub-8 inch screens) will account for as much as 60% of the tablet units shipped in 2013. ^[6] We, therefore, believe that HP’s Slate tablet will be able to capture a sizable chunk of this growing tablet segment and drive revenue growth going ahead.

The successful launch of tablets is important for HP as it not only addresses one of the biggest emerging opportunities in the hardware space, but also fills the missing product offering in its product portfolio.

HP’s PC and Workstation division is the fourth largest division, which contributes 30% to its revenue and makes up almost 15% of its estimated value by our estimates. According to IDC, HP posted a substantial 23% double-digit decline in shipments in Q1 CY13. HP’s market share in PCs declined from 17.7% in Q1CY12 to 15.7% in Q1CY13. We expect HP’s revenues for PC division to get a boost from tablets sale. If HP were to capture only 1% of the expected tablet shipments share, it can sell nearly 3 million tablets. This could translate to around $600 million in revenues and $30 million (at EBITDA margins of 5%) in EBITDA for HP.

We currently have a near $19 price estimate for HP, which is ~15% below of the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. IDC Forecasts Worldwide Tablet Shipments to Surpass Portable PC Shipments in 2013, May 28^th 2013, www.idc.com [↩] [↩]
2. Worldwide Smart Connected Device Market Crossed 1 Billion Shipments in 2012, March 26 2013, www.idc.com [↩]
3. IDC Forecasts Worldwide Tablet Shipments to Surpass Portable PC Shipments in 2013, May 28 2013, www.idc.com [↩]
4. IDC Prediction’s 2013 : Competing on the 3rd Platform, February 21 2013, www.idc.com [↩]
5. IDC Forecasts Worldwide Tablet Shipments to Surpass Portable PC Shipments in 2013, May 28 2013, www.idc.com [↩]
6. IDC Forecasts Worldwide Tablet Shipments to Surpass Portable PC Shipments in 2013, May 28 2013, www.idc.com [↩]