Do These Server/Hardware Leaders Present Investment Upside?
Hewlett-Packard , Cisco , and International Business Machines are three of the largest companies in servers/hardware. This large segment might be important in the fundamental performance of other divisions within technology, meaning hardware sales might indicate whether to invest in these three companies.
Two clear-cut leaders
HP and IBM are equally massive technology companies, but have traded in opposite directions in the last two years. HP has been restructuring its business and is now experiencing growth in several segments. Meanwhile, IBM struggles in many of its key businesses.
Furthermore, for IBM investors, the bulk of concern and reason for fundamental loss has been the continued growth of the cloud segment, which has stolen dollars from the on-premise IT market. While this might be IBM investors' primary concern, perhaps they should be more worried about the company's growing fundamental disconnect in hardware.
For IBM, hardware accounts for 15% of total revenue, a percentage that has shrunken mightily in recent quarters. In the third quarter of 2013, hardware fell 17% year-over-year, but in this recent quarter it fell 26%.
According to IDC, IBM's hardware market share declined 430 basis points in the third quarter of last year to 23.4%. In the meantime, HP's market share increased 150 basis points to 28.1%. This is a space that IBM used to dominate with relative ease.
Given IBM's most recent 26% decline, showing an acceleration of loss, coupled with HP's earnings last week, showing a 5% rise in hardware, it seems logical that HP's market share will continue to rise while IBM's will decline further.
At roughly 20% of total sales, this growth should be considered a positive for HP investors, as it shows that the company is winning its battle with IBM for this space. Additionally, it shows that IBM could have further fundamental declines in the quarters ahead.
An emerging competitor
In addition to HP and IBM, Cisco is another major hardware/server manufacturer, and along with HP, is one of the only top five companies in this space to have seen recent growth. This is an industry that has seen a slight increase in volume, but competition has put some pressure on pricing, which was noted by HP's CEO during the company's most recent conference call.
However, Cisco considers hardware a major segment of its future. In Cisco's third quarter, it created nearly $600 million from this segment, a jump of 42.7% year-over-year . Therefore, given Cisco's 7.4% revenue decline, it makes sense that the company will continue to bolster its hardware efforts. Moreover, with a market share of only 5% in the hardware/server industry, Cisco has room to keep growing.
Cisco's rapid growth, combined with HP's new-found dominance in this space, does not bode well for IBM. In a recent interview with the Wall Street Journal, Meg Whitman explained that hardware is increasingly being pivoted in software, or goes hand-in-hand with security, big data, and software, which likely explains why HP has placed such an emphasis on growing larger in this space.
As a result, Whitman disclosed that HP is prepared to double-down its initiatives in hardware and intends to make sizable investments in the coming quarters and years to stimulate further growth.
For IBM investors, they likely consider hardware irrelevant to the company's big picture, but IBM is fundamentally trending in the opposite direction of its peers.
Cisco still has a lot to work out in regard to losing router share to competitors like Alcatel-Lucent and Juniper, meaning that in some ways Cisco is very much like IBM. The company has both strong and weak segments of its business, and overall is seeing large fundamental declines. Therefore, it's hard to call Cisco a good investment, although server/hardware could provide a bright spot once its other business begins to stabilize.
On the other hand, HP is beginning to see its business flat line, as its strong segments like hardware and personal systems are beginning to cancel out the weakness in services and software. Furthermore, if Whitman is right about hardware being the glue that holds services and software together, the company's plan to growth is transparent and will likely be effective.
Overall, this bodes very well for HP, and could be bad news for IBM.
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The article Do These Server/Hardware Leaders Present Investment Upside? originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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