I call it the future of computing.
But what The Machine will do – the idea behind this breakthrough hardware – is much simpler to explain.
According to Hewlett-Packard scientists, The Machine could replace an entire computer data center with a single computer the size of a refrigerator.
These data centers, aka “server farms,” are huge clusters of computer servers that function as the “physical Internet” for technology companies – they house these companies’ most important and vulnerable network components and information. A big server farm can be more than 100,000 square feet large and use as much power as a small town.
Hewlett-Packard Chief Executive Officer Meg Whitman discussed The Machine at a company-sponsored event in Las Vegas last month, but the major media pretty much ignored the news entirely.
Because Wall Street and most investors seem to have discounted HP’s Machine so far, we have a chance now to get in on the ground floor.
Today, I’m telling you all about The Machine.
And I’m going to tell you about a conversation I had with a top turnaround executive that leads me to believe HP CEO Whitman knows that bringing her company back to prominence will require much more than just the slashing and burning we’ve seen so far.
So let’s take a look at all of the components that make this turnaround so exciting for investors…
HP has done a lot of cost cutting. Over the past couple of years, Whitman has cut at least 45,000 jobs out of its 300,000+ workforce.
But layoffs aren’t the only or best way to restructure a company.
I’m passionate about turnaround investing, and so, even after 30 years of researching and investing in Silicon Valley, I’m always seeking wisdom about that sort of “special situation.”
And one of the best bits I’ve ever heard came from a one-time Methodist minister who became one of corporate America’s great cost cutters. A few years back, I was fortunate enough to get to pick his brain.
“You know, Michael,” Cooper said during the meeting in his office. “Always keep in mind that you just cannot cut your way to greatness.”
His comments hit on something that many investors and analysts often overlook.
To succeed over the long haul, tech company restructurings must include plans for the next generation of cutting-edge products. Otherwise, the relentless pace of innovation will leave them in the dust.
HP is managing to do both – cut costs and develop a groundbreaking new innovation that bodes well for the firm’s long-term success.
From its founding in Palo Alto, Calif., during the depths of the Great Depression until the last few years, this Silicon Valley founding father has pushed the boundaries of computing tech in ways few firms could emulate.
Despite its troubles, HP remains a world leader in PCs, a key maker of computer servers and scientific calculators, and one of the world’s most successful printer firms. And it’s a huge supplier to the U.S. federal government.
At around $36, HPQ stock is up more than 215% since bottoming out around $11 in November 2012 – and it’s already up nearly 6% since I recommended it to you on July 3. But CEO Whitman remains ruthlessly devoted to the bottom line. She continues to cut costs and employee overhead wherever possible.
At the same time, she refuses to get sidetracked by the chaotic environment surrounding HP. Before Whitman arrived in September 2011, the company had gone through five chief executives in six years.
Even worse, the company had to write off nearly $17 billion in charges for bad mergers undertaken by her predecessors. And it’s still paying the price for having missed the mobile revolution.
So, you could forgive Whitman if all she did was focus only on getting HP back on solid footing and let the future take care of itself.
That’s why Whitman recently green-lit the truly game-changing Machine.
If the venture succeeds – and all signs are positive – The Machine will have an enormous impact on the future of computing… and our portfolios.
Here’s why. Today’s server farms are located in huge buildings that have acres of servers and related gear.
HP wants to boil all that down to one machine that could fit in your family’s kitchen.
Doing so would give HP a brand-new, likely hugely profitable piece of hardware that is less of a product and more of a generational step forward.
With cloud computing, large entities host their data, software, and applications at these remote server farms. Big Data is a field in which supercomputers mine mountains of data to find profitable trends or relationships too complex for even teams of dedicated professionals to spot.
And the Internet of Everything is the “super Internet” that will connect an estimated 50 billion devices within just a few years, turning Earth into a hyper-connected “smart” planet.
All of these functions – and especially the IoE, which is still in the development stages – require a lot of computing power. And that power is extremely expensive, based on energy use alone.
With The Machine, “energy consumption problems will virtually disappear,” Whitman says.
If this sounds like “moonshot thinking,” it is…
While developers may try out some smaller Machine applications on Android-enabled devices first, to fully develop The Machine, HP engineers are now writing millions of lines of software code for an entirely new operating system.
Then there’s the incredible new tech product that lies at the heart of The Machine – a highly advanced computer processor known as a “memristor.”
Electrical engineers and computer scientists have been working on memristors for more than 40 years, starting with circuit theorist Leon O. Chua at University of California, Berkeley, back in 1971. And in 2010, HP unveiled a working device for the first time.
Now, HP says it’s ready to use in the next generation of computers and servers.
Memristors are highly complex. I’ll try to simplify by comparing them to semiconductors.
Computer semiconductor chips can either provide processing power or short-term memory. Transferring data between two devices takes time and burns energy.
Memristors perform these processing functions while also serving as computer memory, thus replacing the transistors that form the building blocks of semiconductors.
Plus, memristors can be stacked on top of each other to form 3-D arrays, like mini-towers inside a computer.
Here’s how I know for sure that Whitman understands why “you can’t cut your way to greatness,” as Cooper said.
Word around the HP campus is that two years ago some senior researchers gave Whitman a presentation on The Machine. It lasted two hours.
Whitman, the story goes, immediately saw the potential. And despite the fact that she was in the midst of cutting huge chunks out of the firm’s budget, she immediately gave them the green light right then.
She reportedly turned to HP’s chief financial officer and said, “Find them more money.”
HP now says the new product could be on the market by 2018. So, it will be a while before we see meaningful revenue.
But remember, HP is still turning around, and Whitman is doing a great job of restoring profits to the venerable firm.
Consider that in this year’s first fiscal quarter ended April 30, HP’s profits were up sharply. They rose roughly 18% from the year-ago fiscal quarter to nearly $1.3 billion.
HPQ stock trades at nearly $36 and has a market cap of $67.37 billion. So far this year, the stock is up more than 30%. Compare that with the less than 8% advance of the Standard & Poor’s 500.
If HPQ just gets back to its five-year closing high of $53.87, reached April 5, 2010, that would mean profits of nearly 50%.
And with Whitman at the helm, I think that’s the least we can expect.
Certainly, she’s making cuts, which will increase earnings per share, always a great catalyst for a stock. But more importantly, she’s investing in cutting-edge technology that lays a solid basis for HP’s future.
So, I recommend you buy in now, before The Machine finds its mass audience.
You’ll get “in the know” bragging rights – and the most profits.