HP Job Cuts: One Small Step on a Very Long Road
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In a tough employment market, it seems almost crass to applaud the decision to cut jobs. But as investors, you know that's the world we live in. When a company -- in this case Hewlett-Packard (NYS: HPQ) -- is trying to find its way, dramatic steps need to be taken. The steps took the form of an additional 2,000 lost jobs at HP, beyond the 27,000 CEO Meg Whitman announced in May.
The harsh reality
The positive stock-price movement after the Sept. 10 expense-reduction announcement does little for the soon-to-be-unemployed HP staffers. But for shareholders, any news that raises HP's share price is welcome. Why? Because even after Sept. 10's nearly 2% price appreciation, the stock price is down over 30% year to date.
The expected $3.5 billion in annual savings (by 2014) the reduction in workforce generates will certainly help the beleaguered global PC sales leader. What should concern investors is where many of the job cuts will come from: one of HP's key divisions -- the enterprise services group.
Though networking revenues were up 6% versus last year in HP's recently announced Q3, the units' servers, critical business systems, and storage revenues all dropped. So it makes business sense that these areas -- along with the poorly performing services unit -- would see the majority of the job cuts, right?
Here's the problem: As HP tries to reinvent itself, a la Dell (NAS: DELL) , a shift in focus toward data centers and cloud technologies would seem to be in order. The transition to the burgeoning cloud and hosting solutions businesses is why Dell is a screaming buy, even before the recently announced dividend (more on that here).
HP's head still in the cloud
Even as the announcement regarding additional layoffs continue to resonate, HP isn't entirely abandoning the cloud, or the growth potential it represents. On Sept. 5, HP issued a press release discussing the expansion of its partnership with Microsoft (NAS: MSFT) to bring one-stop cloud shopping to clients.
The objective is to simplify the process for clients wishing to take advantage of the cost savings and ease-of-use the cloud offers, while addressing security and barriers to entry. By combining HP's CloudSystem solutions with Microsoft's servers and system centers, clients are able to quickly and inexpensively adopt cloud services into their daily activities. Microsoft, along with IBM (NYS: IBM) , both got on board with the cloud some time ago of their own accord, and they and their shareholders are reaping the benefits.
Dell is just starting to make cloud and data-center inroads, but there's a big difference between it and HP. As HP announces layoffs in the enterprise unit -- even with the new Microsoft alliance -- Dell continues to grow aggressively in these key areas. The integration of multiple acquisitions, along with the hiring of former HP enterprises business unit executive Marius Hass, speaks volumes about the direction Dell is focused on.
For Dell at least, the strategy's working. Dell's enterprise business continues growing as a percentage of total revenues. Server, networking, data storage, and related services are also contributing larger amounts to Dell's bottom line. HP? It's opted to focus the reduction in workforce on the enterprise and related services units. What we have here is a tale of two strategic directions, one via an emphasis on internal growth in an exploding market and HP's plan -- partnering with a leading cloud innovator in Microsoft.
What's an investor to do?
If growth in the tech sector is what you're after, Dell is hands-down a better option than HP. And both Microsoft and IBM, in spite of year-to-date run-ups of 18% and 9.5%, respectively, are more diversified and better positioned to benefit from new markets like cloud and data centers than HP, too.
Now, don't get me wrong. With $9.5 billion in cash on the books and a dominant PC market share, it's not like HP is going away anytime soon. And the more aggressive stance on cutting expenses, even with the associated one-time expenses HP will incur as a result, needs to happen. But the problems go beyond shaving overhead.
What will HP become when it grows up? If the latest announcement is any indication, it isn't quite sure yet. And that's why HP still has a long journey ahead.
For a more diversified investment option in the tech sector, Microsoft is one to seriously consider. New systems, new products, and an entry into the mobile computing sweepstakes makes Microsoft an intriguing play right now. Before diving in, you want to make sure you have all the information you need. So, take a look at the Fool's special free report on all things Microsoft.
The article HP Job Cuts: One Small Step on a Very Long Road originally appeared on Fool.com.Fool contributorTim Bruggercurrently holds no securities positions, including any mentioned in this article. The Motley Fool owns shares of Microsoft, Apple, and IBM.Motley Fool newsletter serviceshave recommended buying shares of Microsoft and Apple, creating a synthetic covered call position in Microsoft, creating a bull call spread position in Apple, and creating a synthetic long position in IBM. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.
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