HP's tablet woes don't bode well for results

August 18, 2011: 11:18 AM ET

It didn't help that Best Buy asked it to take back its tablet which was a dud with consumers. But its core businesses aren't doing well either.

TouchPadFORTUNE -- A report that Best Buy wants Hewlett-Packard to buy back all the TouchPad tablet computers that the retailer is storing, unsold, couldn't have been timed worse. HP is slated to announce its third-quarter results on Thursday, and while the TouchPad makes up only a tiny sliver of the company's business, it has been garnering the most attention recently.

It doesn't help that HP's (HPQ) core businesses aren't doing so well either. The company's stock fell more than 4 percent on Wednesday after analyst downgrades and grim forecast by PC rival Dell (DELL).

(Update Thursday 2 p.m.: HP is planning to spin off its PC unit and is in talks to buy software maker Autonomy for $10 billion in order to concentrate on its higher-margin enterprise software and services businesses, Bloomberg News reported. It's a similar trajectory to the one taken by IBM (IBM), also once a hardware powerhouse. HP's stock has been volatile since the news was reported. As of 2 p.m Thursday, it was down about 4.5 percent.)

(Update 2 Thursday 3:30 p.m.: HP reported that it plans to announce that it will discontinue operations for webOS devices, specifically the TouchPad and webOS phones. HP will continue to explore options to optimize the value of webOS software going forward.)

The TouchPad appears to be a total flop. HP priced it similarly to the iPad, with which it hasn't been favorably compared. A series of discounts hasn't helped much. Best Buy (BBY) has reportedly sold fewer than 10% of the 270,000 TouchPads it has in its inventory, and would like its money back on the rest.

That's quite a comedown since May, when one HP exec predicted that the TouchPad would eventually overtake Apple's iPad (AAPL). Not that any other tablets are having much luck catching up with the iPad.

Meanwhile, HP's PC business isn't doing so great either. PCs represent the company's biggest chunk of revenue, but margins are thin and sales are slow industrywide. It's the least profitable part of HP's business, which is why the company is looking around for something with fatter margins -- which may to some degree explain the initial overpricing of the TouchPad.

Investors on Thursday will be looking for good news in two other areas of business: networking and services. CEO Leo Apotheker has blamed the regime of former CEO Mark Hurd (who was ousted a year ago amid scandal) for neglecting these areas, which offer much better margins than hardware does.

But blaming past administrations can work for only so long. In downgrading HP on Wednesday, BMO Capital analyst Keith Bachman noted that "…previous management did not provide guidance, and then miss for three quarters," as HP has done.

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