HP and EDS: No hardware for us

By looking at other companies that sell services and PCs, it has occured to Hewlett-Packard (NYSE: HPQ) that the hardware business is getting more competitive and that margins are moving down, But hardware is still the largest revenue center at the big tech company, and that may be the single greatest failing of the current management. It has not created large enough software and services businesses to match the hardware sales.

HP brings in less that 25% of its revenue from services. But that business is growing quickly. According to the company's 10-Q, it had revenue of almost $4.4 billion in the first quarter. In the same period a year ago, that number was $3.9 billion.

The prevailing theory is that HP plans to buy EDS (NYSE: EDS) for $12.6 billion for its revenue from consulting and outsourcing to better compete against IBM (NYSE: IBM). That may be true, but the actual reason may be much more simple than that. With its stock up 50% over the last two years, HP needs a new business to keep its revenue growing and its shareholders happy. That is not going to come from its ink and printer business. Buying EDS almost guarantees another two years of rising revenue and earnings.

Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.