Technology giant, Hewlett-Packard, has been restructuring its business to boost profitability and focus on new verticals that offer better growth opportunity. As part of this strategy, the company is continuously expanding its portfolio of cloud services. In a recent move, the company has struck a partnership with German enterprise software developer, SAP AG, to deploy SAP’s in-memory database platform HANA as a Software-as-a-Service (SaaS) model. We believe that this offering was a logical extension to an earlier deal according to which HP is the primary infrastructure provider for SAP-HANA deployment that will be carried out by Accenture. In this article, we will explore why cloud services are important for HP, and how it can generate more revenue for the company in the future. Furthermore, we will briefly explain the new cloud product offered by HP.
Why Are Cloud Services Important for HP?
HP generates nearly 75% of its revenues from hardware sales or hardware related activities. However, this business has low margins primarily due to intense competition from other manufacturers such as Dell, IBM, Lexmark etc. While the hardware business is HP’s cash cow, it is constantly diversifying its business by expanding its services division, especially the cloud business to infuse growth and improve profitability. HP’s services division contributes nearly 31% to its estimated stock value. Within this division, the three verticals i.e. technology services, infrastructure outsourcing and application and business services provide cloud related services. This division and its three sub division are expected to drive revenue growth for HP going forward, primarily due to adoption of cloud services by its clients.
According to our estimates, the technology services make up 15.5% of HP’s estimated value. The technology services division focuses on helping organizations improve their IT operations and transition to new technologies, such as virtualization, cloud computing and converged Infrastructure. We believe that technology services is responsible for delivering Platform-as-a-Service (PaaS) services since it combines all the ingredients such as cloud computing, converged infrastructure and virtualization. Currently, we estimate that revenues from this division to grow from $8 billion in 2013 to $10 billion by 2020. We believe that majority of this growth will come from cloud services especially PaaS. If HP can capture 5% of the expected $44 billion PaaS market, the revenue for this division can be significantly higher.
According to our estimates, the infrastructure outsourcing services makes up 10% of HP’s estimated value. It encompasses the management of data centers, IT security, cloud computing, workplace technology, networks, unified communications and enterprise service management. Since this division extensively deals with the infrastructure needs of a client, we believe that HP’s IaaS solution fall under its umbrella. Currently we estimate IOS revenues to increase from $14.6 billion in 2013 to over $17 billion by 2020. However, if HP were to get a significant chunk of IaaS market due to its dominant presence in the hardware (Server, storage and printing) industry, its revenues can be significantly higher, and our stock price estimate can increase by 10%
According to our estimates, the application and business services makes up 6% of HP’s estimated value. This division helps HP’s clients to modernize, develop, manage and integrate applications and information assets. HP delivers most of its SaaS solution through ABS. Considering, the expected growth of SaaS in the future, this division will be an important driver for HP’s revenue growth. While currently we project revenues from this division to grow from $8.7 billion to $10 billion by 2020, if HP were to capture 5% of the SaaS market, ABS revenues can grow to over $13 billion by 2020.
HP Expands Cloud Offering
As part of its strategy to focus on cloud services, the company has recently tied up with SAP to offer its in-memory HANA as a service. HP As-a-Service solution for SAP HANA can include the software license for SAP HANA, along with hardware and ongoing management services, bundled into a complete solution provided in a cost-effective, as-a-service model.
We believe that the company is well positioned to ride the wave of growth in the cloud computing industry through its portfolio of services. However, it remains to be seen whether the company can capitalize on its longstanding relationship with its clients to deliver outstanding Cloud computing services, especially in the face of intense competition from Amazon, IBM, Rackspace etc.
We presently have a $25.04 price estimate for HP, which is 25% below the current market price.