More Bad News for Hewlett-Packard

It’s been a hard road for Hewlett-Packard (NYSE:HPQ) as the personal computer maker has struggled with shrinking PC sales and a failed attempt to make its mark on the tablet industry. Now, Jefferies & Co has downgraded the company from “hold” to “underperform,” on the expectation that problems in HP’s personal computer, services, and printer businesses will continue.

Jefferies said it expects HP to aggressively invest in tablet and smartphone development, which after its PlayBook flop sounds a bit risky, prompting the firm to cut its price target on the company’s stock to $14 from $17. HP shares closed at $17.06 on Friday, down over 33 percent this year and 65 percent in the last five years, since Apple introduced the first iPhone and the PC market was forever changed.

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Recent comments from HP suggest that it is, in fact, focusing on tablets and smartphones again, Jefferies analyst Peter Misek said in a note to clients. “While the move makes sense strategically, we see it as a high risk move. On top of adding costs and working capital burdens to an already stressed balance sheet, there could be additional write-offs,” Misek said.

Meanwhile, HP’s services business, which provides outsourcing and support services, will likely decline as old contracts for its AlphaServer product expire in 2013. Inventory problems at its printer business will also take several quarters to be resolved, Misek predicts. So while HP revenues take a hit from lost business, the four-star rated analyst is concerned the company will throw away even more money trying to enter a market dominated by the biggest tech heavyweight the world has ever seen: Apple (NASDAQ:AAPL).

The iPhone and iPad are serious competition even for the industry’s other major smartphone and tablet producers. Even though Google’s (NASDAQ:GOOG) Android powers more smartphones than any other mobile operating system, including Apple’s iOS, the iPhone remains the world’s single most-popular smartphone, and the iPad the world’s most popular tablet. Amazon (NASDAQ:AMZN) and Barnes & Noble (NYSE:BKS), with their Kindle Fire and Nook tablets, pose perhaps the most formidable competition for the iPad, and yet still only account for a fraction of the tablet sales that Apple does.

Android and iOS account for the vast majority of mobile devices — Microsoft’s (NASDAQ:MSFT) Windows Phone has barely made a dent, and Research in Motion’s (NASDAQ:RIMM) once industry-leading BlackBerry has watched its market share erode in recent years. HP’s best chance for success, if it is going to build a smartphone or tablet, is to use the already-popular Android platform, for which tens of thousands of apps already exist. Microsoft and RIM have struggled to convince developers to create apps for their own platforms when the Android audience is already so much more broad, and that’s hurt their ability to become widely adopted.

HP will also have to find something new to do with the tablet, and be careful to avoid infringement issues that could cripple its devices before they even take off, and increasingly large problem in the mobile device industry. But if HP is going to survive, or thrive, it’s going to have to evolve. While Misek may be right in predicting near-term declines, that may be a necessary risk in the company’s fight to stay relevant.

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