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HP: Does It Have a Chance Against Apple?

For computer giant Hewlett-Packard (HPQ), I think it's fair to say after its most recent earnings report -- one which includes measures to save the company $3 billion to $3.5 billion over the next couple of years -- that the company has been on a bit of a roll these days.

Of course, I say this relative to an operation that was once perceived as being in constant disarray as evident by the frequent use of the turnstile, also known as the chair of the CEO. However, based on the stock's current trading activity, it seems investors have yet to appreciate where the company is now heading.

It was not too long ago that the talk on Wall Street was that the company was going to scrap its fledging PC business and leave what is broadly known as a low margin business solely to Dell (DELL). The so-called "death of the PC" was imminent.

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It became clear that HP had no interest in making it a slow and painful death. Instead it showed it wanted to expedite the process and euthanize what was always a critical part of its business.

The company wanted to erase some past mistakes, including tactical errors such as encroaching on Apple's (AAPL) territory with its TouchPad tablet without being adequately prepared. It wasted valuable time and resources producing the tablet when evidence suggested that it was not going to work. Research In Motion's (RIMM) PlayBook, Dell's Streak, and even Cisco's (CSCO) Cius tablet were all falling by the wayside.

Apple understood consumers, but the specialty for HP, et al., was the enterprise. But what has happened is that the enterprise user and the consumer became one and the same.

The good thing for HP is that it now has Meg Whitman who appears ready and able to clean things up. It is clear that she has the management structure in place to get the company to where it needs to go.

However, as good as things appear to be progressing now, the question is, will it ever be good enough? In other words, where should the bar be set and should it be bold enough to include beating Apple at its own game? I suspect that is what it is positioning itself to do.

However, as a longtime HP apologist, I will concede that standing up to Apple is no small task even for technology powers such as Google (GOOG), Microsoft (MSFT), and Amazon (AMZN), much less HP, which has long suffered from a nagging history of a weak R&D.

Where HP falls short on innovation, it hopes to make it up in the area of execution. This is where Whitman has centered her focus and the reason for Wall Street to take notice. But it seems that analysts remain unimpressed, despite the better-than-expected report.

Be that as it may, it required precise execution by the company under a considerable amount of pressure to deliver the performance that it did, particularly in light of Dell's recent disappointment and Cisco's uninspiring outlook for the coming quarter.

However, though HP opted to play it safe, investors would be wise to look beyond the conservative guidance and understand what it has coming ahead. Not least is the fact that the company is due to release its new line of Ultrabook machines that are based on Microsoft's Windows 8 platform, designed specifically to take a bite out of Apple.

HP is betting heavily on the success of this launch as a way to secure some market share from Apple and dispel notions of PC deaths. It is also hoping that Microsoft's release of Windows 8 generates an increase in sales of not only the Ultrabooks, but also its PCs and its TouchPad tablets.

I think this is a safe bet. It would be getting ahead of myself to estimate the extent to which HP can disrupt Apple's reign. But that doesn't mean a good turnaround story should be downplayed.

Bottom Line

While it is still too early to proclaim the resurgence of HP, Wall Street should give the company its due credit. Granted it was not an Apple-like quarter, but it was far from terrible. The company is growing modestly, but I question how much growth is left in its PC and printing businesses.

HP's challenge is to figure out a way to grow its high-margin segments such as services, networking and storage. Nonetheless, what it has recently been able to do has now placed it on a path of restoring its lost credibility and returning value to shareholders. From that standpoint, I consider the stock significantly undervalued today by at least 20%.

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