Why HP might be the next cloud bubble to pop

Hewlett-Packard is depending on cloud computing for growth. The problem is, so is everyone else in technology.

By TheStreet.com Staff May 8, 2014 12:37PM

Hewlett-Packard international offices in Meyrin near Geneva © DENIS BALIBOUSE/Newscom/ReutersBy Dana Blankenhorn, TheStreet

While Google (GOOG) and Amazon (AMZN) have rolled over in price, and IBM (IBM) has fought to hold steady, Hewlett-Packard (HPQ) has kept powering upward, helped now by its planned $1 billion investment in cloud computing.

HP's shares are up nearly 45 percent since CEO Meg Whitman came on board in September, 2011, and a spectacular 170 percent since their November 2012 low. With the company's market cap now at about half its sales, some analysts still consider it a bargain.

But this looks like a bubble that is ready to pop.

TheStreet.com logoHope for growth at Hewlett-Packard lies in cloud computing. The company said this week it will put $1 billion into cloud products and services over the next two years, using the brand name Helion, and deliver its own distribution of the open source OpenStack cloud infrastructure system.

The problem is $125 million a quarter is chicken feed in the cloud wars, and profits there are becoming increasingly hard to come by. HP doesn't even lead the OpenStack project. Red Hat (RHT) is the largest contributor, followed by IBM.

The 29 analysts currently following HP stock expect earnings per share to come in at 88 cents when results for the April quarter are announced later this month. That would beat the January quarter's 74 cents per share by about 20 percent.

So far, Whitman has kept earnings high through cost-cutting, with plans to cut 5,000 from the payroll during this fiscal year alone. But this is also the year Whitman promised the company would start growing.

Cloud is a big part of that. The company's plan is to package its data centers as private clouds, to build public clouds for enterprise customers using OpenStack, and to make big promises on security and privacy that enterprises will pay up for.

The problem is that every other tech giant is doing the same thing. IBM said it would put $1.2 billion into building 40 OpenStack data centers in JanuaryIntel (INTC) put more than $700 million into buying just a piece of a single cloud software outfit, Cloudera, in April.

All these investments are dwarfed by the billions being put into cloud by Amazon, Google and even Microsoft (MSFT), each of which may put $1 billion into the space this quarter alone. (Microsoft owns and publishes MSN Money.)

The result has been a spectacular cloud price war. To gain market share, any vendor has to match the pricing of Amazon, whose prices start at free. Since announcing it would match Amazon's pricing early this month, CenturyLink (CTL) has gone down despite beating the Street on earnings thanks to broadband growth.

HP has talked about getting into 3D printing, but a promised June announcement on that front has been put off until at least the fall.

The company has lost its status as the leading PC maker to Lenovo, and the total market continues to shrink. The company joined the market for "phablets" earlier this year but still has a negligible market share.

So where's the growth? HP says the growth is in cloud. But with cloud services subject to a severe price war, and even HP's moves in private clouds and OpenStack being matched by other vendors who are equally hungry, it's hard to see a win here that will benefit investors.

Just about every other tech company has rolled over. Isn't it time for Hewlett-Packard to do the same?

At the time of publication the author owned shares of AMZN and GOOG.

More from TheStreet

May 12, 2014 12:33PM

The Street has been providing bad advice on HP since the stock was in the low teens.  Now having missed the run up and the stock in the 30’s there seems to be a break with reality at “The Street”.

Forrester recently ranked HP’s cloud solution as #1.  HP is the definitive leader in open stack infrastructure.  The servers, storage, and network gear that HP builds and includes in their solution are all Gartner Magic Quadrant.  No other vendor can make this claim. 

The open approach that HP is taking with OpenStack is the perfect complement to the industry leading IT infrastructure HP provides the market.  HP is also leading the way by providing indemnification with their OpenStack product suite, eliminating risk to HP customers related to potential intellectual property issues.  HP learned this lesson with the work they did with Linux in the last decade.

HP has over 2500 customers using HP on-premise cloud solutions (private cloud) and leads the industry providing cloud solutions to the tier one cloud providers (public cloud), all with a single, turn-key, highly scalable open solution based on OpenStack.

Check out the last paragraph of this article.  This is how the Cloud is being procured by the tier 1 providers, buying tens of thousands of HP servers in massive chunks. 

My question to "The Street" is that if you add up the total loss of all of your clients that have taken your advice on HP stock in the last 18 months and add to that the total loss of your clients that shorted HP based on your advice.  Would that add up to more than the billion dollar investment HP is making in cloud?  Either way, it’s definitely not chicken feed.

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.





Quotes delayed at least 15 min