Jim Chanos: Hewlett Packard 'Ultimate Value Trap'

"What they will tell you is that the stock is cheap, with a forward P/E of 5, an enterprise value to EBIT of roughly 6 times, and great free cash flow, free cash flow yield of 10.7% using the latest 12 month figures, and a company that’s buying back lots of stock. All the classic signs of a great value situation, hopefully. There’s a fly in the ointment. In the case of Hewlett-Packard and a number of other well-known marquee technology companies, they are hiding their R&D spending through acquisitions. This is an important concept that a lot of people miss. If you look at HP’s revenue stream, it’s basically flat over the past four or five years, their cash flow is basically flat over the past four or five years. But they have done $36 billion in acquisitions over that time frame. Those acquisitions have enabled them to maintain a revenue base and see a declining cash flow base. Those are maintenance capital expenditures or maintenance R&D hidden as acquisitions ... In addition, the balance sheet has been destroyed here."

“People will still buy PCs. It just won’t be a very profitable business”