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Server Sales are Driving the Tech Market Right Now

Unless you’re an IT pro, it may be surprising to you that HP is the world leader in server production and sales of servers. For many people—if they thought of it at all—IBM was the name once associated with servers around the world. Some people may be surprised that IBM has fallen to third after HP and Dell. The truth is, HP is not even HP anymore when it comes to the manufacture and sale of servers. HP is now HPE–Hewlett Packard Enterprises marking more moves to gain a renewed focus for its business model.

The change in name from HP to HPE comes from an effort by the huge enterprise to slim down and focus on more specifics—including making and selling servers. By decreasing their overall scope, HP hopes to grow with focus rather than old model of more diversity. By doing fewer things, but doing them better, the hope is that their market share in those specific focuses will grow. One of the specific things that HPE has on the market is servers. It’s estimated that there may be 40 million servers manufactured by Hewlett Packard working across the globe right now. 

Recent Market

With the good news worth noticing and celebrating for HPE, not all is perfect regarding the company finances. The parent company, is getting rid of its service business by, among other focuses, creating a merger with CSC. It is also getting rid of its software business by merging that part of the business with Micro Focus. These mergers, and others like them have allowed HP to focus its business related spending.  IBM, which used to top the market in server sales and production, has also reimagined its focus by merging or selling parts of its company that take away from the things it now wants to focus on, which also includes servers. 

These changes, which may seem dramatic to those who have invested in or observed HP for years, have resulted in some bumps in the road, even as HPE continues to lead the industry in production and sales. The last fiscal quarter of 2016, which ended in October, HPE’s revenue had dropped 7.2%. This was a revenue of $12.48 billion. Net income came in at $302 million. Last year net income was $1.39 billion. As one pundit commented, it seems that HP has been making more money selling businesses than it has from selling its products. Eventually, those businesses are gone.

Lest the average person worry about what HP can do about decreasing revenue, the company has upwards of $13 billion in the bank. The banked money will give the company time to make the moves that it wants to make so that it can be the kind of company it hopes to become. 

Some of the problems that companies like HP face include the fact that businesses can make their own servers for a small fraction of buying servers from HP. The way HP, Dell, IBM and the other larger businesses can keep competitive is to make big sales to big companies. The mom-and-pop store on the corner might be ahead to have some tech guy build them a server because it will be cheaper, but it is unlikely that GM will have 100 or 1,000 servers built one piece at a time by their IT department. It is big sales to companies like GM or IKEA that keeps big companies finding profits in the manufacture and sale of servers.

Market Size

As HP continues to transition away from parts, service, and software, it now has a 25.4 percent share in the server market. Dell, the#2 server producer had a 19.2% share, IBM, which used to be the top producer and seller of servers, now has a 9.8 percent share in the market. The server market saw shipments increase 2.6 percent during the second quarter compared to the previous year. HP saw its market remain the same from the previous year. Dell saw growth from 17.5 percent of the market, and IBM saw its share drop from 14.8 percent in the second quarter of 2015 to 9.8% in the second quarter of 2016. Meanwhile, the number four player in the market also saw an increase. Lenovo rose from 6.4 percent last year to 7.2 percent this year.

Experts in the industry say this growth is good for the server market. The modest growth during the second quarter of this year was just as experts predicted, and it is part of an expected increase in servers sold. Meg Whitman, CEO of HP has set a target of two percent to three percent growth each year in servers. This should provide the modest but steady growth investors have sought from HPE, and justifies the move to eliminate some of its offerings.

Investors and market analysts seem to agree: when it comes to evaluating the financial health of technology companies, companies like HP, IBM, Dell, and Lenovo, as the server market goes, so goes the success of the business. This knowledge makes this most recent news important for tech investors.