Hewlett-Packard Co. shares sank Tuesday after a Goldman Sachs analyst downgraded his rating on the company's stock, saying the market is too optimistic about the computer maker's potential.
THE SPARK: Analyst Bill Shope downgraded his rating on Hewlett-Packard to "Sell" from "Neutral". The analyst said that he believes the company could lower its earnings expectations in the coming quarters and that its earnings power will be muted during 2014.
THE BIG PICTURE: HP has been struggling with a long-running decline in PC sales, as more technology spending shifts to smartphones and tablet computers. CEO Meg Whitman has repeatedly warned the slump may persist through the rest of this year. To offset the drop-off in PC sales, HP has cut about 15,300 jobs in the past year and is still planning to eliminate about 14,000 more positions.
The company's stock, however, jumped this year on the hope that Whitman will be able to lead a successful turnaround of the company. In late February, the Palo Alto, Calif.-company posted fiscal first-quarter earnings and revenue above expectations.
But there are still plenty of investors still have their doubts about HP's ability to evolve while it also tries to expand into more profitable technology niches, such as business software, data-analysis tools and consulting services.
THE ANALYSIS: Shope said in a note to clients that he believes the company's restructuring actions will be largely countered by weakness in PCs, enterprise hardware, services and printing in its 2013 fiscal year. Additionally, Hewlett-Packard's reinvestment in the business could pressure profit and require more aggressive mergers and acquisitions beyond this fiscal year in order to grow.
He has a $16 price target on the company's shares.
A representative for HP was not immediately available to comment.
SHARE ACTION: Hewlett-Packard shares fell $1.39, or 6 percent, to $21.91 at midday, after earlier dropping as low as $21.82. The stock hit its lowest point in the past 52 weeks in November, closing at $11.71, but had nearly doubled in value since then, closing at $23.31 Monday. Despite the day's fall, its stock remains at the high end of its 52-week trading range of $11.35 to $25.40.