Will Hewlett-Packard Company (HPQ) Continue to Rally?

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When examining the profit centers of HP, one can notice that there is a wide variation among segments in terms of growth and profit margins. The chart below shows the profitability by segments of HP in the first quarter of 2012 and 2013.

As seen, Personal Systems segment recorded very low profit margins of 2.7% as of Q1 2013. The new tablet of HP is part of the company’s Personal Systems segment. This segment’s revenues fell by 7.7% in the last quarter – the sharpest fall in revenues among all other segments. This puts the new tablet in a segment with low profit margins; since it will be sold at a very low price even for other tablets, this could result in another drop in profit margins. So this tablet might eventually raise the company’s revenues, but won’t necessarily lead to a rise in profit margins.

One of the main factors that could revive HP’s growth will be if it will keep augmenting its Research and Development. Despite the drop in revenues, the company maintained its R&D budget and spent nearly 2.8% of its revenues on it. In comparison, Apple spent in the fourth quarter 1.9% of its revenues on R&D, Lenovo spent 1.8% on its sales in the third quarter on R&D, and Dell allocated 2.1% of its revenues to R&D in the recent quarter. So HP, in relative terms, is putting a bit more than other computer companies into its R&D. Will it be enough to put HP over the top? In absolute terms, HP is allocating more than double of its resources to R&D than Dell or Lenovo do; HP’s R&D provision is roughly 80% of Apple’s. So this gives HP a fighting chance to come up with new products that could compete with market leaders.

Hewlett-Packard Company (NYSE:HPQ) is trying to revive its business and is coming out with new products and new directions. The company still has a long way to go until it will be able to show growth in revenues. I’m not certain if the company’s steps will be enough to revive it but perhaps it will come up with new products that will eventfully lead to sustainable growth.

The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

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