By Gannon Kim (BS, Accounting Concentration ’17)
Earlier this year, I was a part of a student team representing the GGU Investment Research Club (IRC) that won the regional CFA Institute Research Challenge (prevailing over graduate schools across Northern California). The competition required teams to research a publically traded company, create a written report, and deliver a group presentation to a panel of financial services professionals. During this year’s competition, we were tasked with analyzing HP Inc. and presenting a buy, hold, or sell recommendation of its stock.
Part of our presentation included an analysis of HP’s 3D printing business, which we felt was a promising endeavor for the company and the key to its future revenue growth.
The portion of the 3D-printing market that prints in plastic material – rather than metal – is of interest to HP. The lucrative nature of these types of products (along with soon-to-be expiring patents of the technology) has attracted a huge upswing of new entrants to the market. This threatens the positioning of current market stakeholders: Stratasys (addressing high-end, commercial-grade needs) and 3D Systems.
HP’s First 3D Printer
HP released their first 3D printer in 2016, the HP Multi-Jet Fusion 3D Printing Solution. The product is bridging the gap between high-end (Stratasys) and entry-level product offerings (those made by 3D Systems and start-ups) — by creating one of the world’s fastest, production-ready machines.
Our team determined that HP’s ability to leverage their supply chain & production scalability, partnerships, and brand reputation will help them — in the words of HP’s 3-D Printing President — “disrupt the $12 trillion manufacturing industry and […] democratize manufacturing.”
In terms of the research process, one take-away from this experience was recognizing the power of conducting a ‘channel check’ — i.e. going into retail stores & interacting with sales staff or asking experts (such as Professor Jain) about their insight about a company.
Consulting with an Industry Expert
As most of the team members had limited familiarity with the 3D printer products & its market, we turned to the insight of Pravin Jain, a mechanical engineering professor at Santa Clara University. His in-the-field expertise provided us with a better understanding of HP’s strategy for 3D products. HP aims to build an ecosystem for its 3D printers and has become very involved in the product development process (which includes the development into the software, material inputs & supplies, and 3D-scanning process) and has since reached out to its academic partners to take part as well.
Drivers of HP’s promising future include the strategic and synergistic alliances that it makes with software companies (e.g. Autodesk, Siemens in order to create a more streamlined product), materials suppliers, and users (for direct input on how the device is being used, performance & improvement benchmarks, etc.). From our channel check, we found that HP is approaching manufacturing businesses (i.e. Nike, BMW, Johnson&Johnson) and research institutions to test its technology.
Overall Analysis of HP
There are three key points that are worth highlighting about HP overall.
1. It is financially “healthy,” having a high cash balance and is looking to return it to investors (making significant stock repurchases in the future).
2. It has a strong management team, with the leadership of CEO Dion Wiesler who adds a wealth of industry experience through his roles in Acer and Lenovo consumer electronics divisions.
3. It maintains dominant positioning in the core business (printers and PCs) – and has the potential for the 3D printer business unit to help the firm grow organically.
However, we are concerned about the state of its core business, as the market has matured and HP faces increased global competition. Revenue has also been declining (since 2015). In addition, the company derives more than half its revenue abroad and has justifiably invested to create a global supply chain – sourcing materials, labor, and clients from other countries. By consequence, any significant changes to U.S. foreign policy can present some amount of geopolitical risk (but was not predictable at the time, particularly with a transition of a new U.S. executive administration).
Our presentation for the competition was more “cautionary” in nature, and we felt that prospective investors probably should not “buy-in” while current holders of HP stock should not head for the exits.
In terms of the “research process,” one takeaway from this experience was recognizing the power of conducting a channel check – i.e. going into retail stores & interacting with sales staff or asking experts (such as Professor Jain) about their insight about a company. Of course, reading online reports can give a good picture, but there is more to gain when it is supplemented by direct interactions.
Our investment rating for HP was “Hold” (neither bull nor bear) because there was quite a lot of positive/negative trade-offs taking place. Our presentation for the competition was more “cautionary” in nature, and we felt that prospective investors probably should not “buy-in” while current holders of HP stock should not head for the exits.
Investment Research Club members with Finance Professor Dave Kaczorowski, CFA (competition mentor) at far left. Continuing left to right: Zhe-Yuan Zhang, William Xu, Gannon Kim (author of this blog post), and Hemal Patel.
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