HP's size matters

NEW YORK (CNNMoney.com) -- Hewlett-Packard has been on a tear since CEO Mark Hurd took over five years ago, but the company's size may start getting in the way of growth and quality.

HP (HPQ, Fortune 500) is the world's largest tech company. It competes with just about every other tech giant, like Cisco (CSCO, Fortune 500), IBM (IBM, Fortune 500), Microsoft (MSFT, Fortune 500), Apple (AAPL, Fortune 500) and even Google (GOOG, Fortune 500).

Last year, HP earned $9.4 billion on $114.5 billion of revenue. The company will announce its second-quarter results after the bell Tuesday and analysts expect HP to report a 22% jump in profit on a 9% rise in revenue, year over year.

Obviously, HP faced some tough headwinds during the recession, so a modest 9% rise in revenue isn't all that surprising, but that's still a staggering rate of sales growth for the amount of revenue HP makes.

To put HP's sales into perspective, if its quarterly sales come in as expected, the company could literally shut down for the rest of 2010 and still be 78th biggest company in the United States, just ahead of Dupont (DFT), and slightly behind Coca-Cola (KO, Fortune 500).

Furthermore, recent acquisitions of Palm (PALM) and 3Com have been applauded by analysts, since they gave HP huge opportunities in the smart phone and networking spaces -- areas where the company didn't have much of a presence.

HP now sells servers, data storage, printers, smart phones, network routers, corporate software, and is the biggest seller of PCs in the world. It also is among the largest tech services providers in the world, and when it completes the Palm transaction, it will sell its own operating system.

A number of HP analysts say they are concerned that HP is getting too big.

"Size works well for them, but the challenge for HP is that it will be difficult for the company to continue to grow," said Martin Reynolds, HP analyst at Gartner.

"They're so big that they are going to have trouble growing faster than the general technology sector spending rate [a key measuring stick for a tech company's sales growth, forecast to be about 7% in 2010]," said Mark Kelleher, analyst at Brigantine Advisors.

"It's a matter of scale: If you try to keep growing that company by 10% a year, you're talking about growing by $12 billion a year, which is a lot of dollars," said Carl Howe, analyst for Yankee Group.

In an attempt to combat a slow down in revenue growth, HP has expanded into new areas. Since Hurd took over in 2005, the company has made five deals worth more than $1 billion, including Mercury Interactive (business software), Opsware (cloud), EDS (services), 3Com (networks) and Palm (smart phones).

HP is still sitting on $14 billion of cash, so it has plenty of money in its reserves to keep making strategic purchases. But eventually, HP is going to run out of business areas it can add.

Areas where HP still lags include database software, storage and virtualization (simulating server and storage capacity).

HP doesn't have its own virtualization unit. Instead, it partners with VMWare (VMW), a relationship that has been great for both companies. But HP's rival Cisco recently entered a virtualization partnership with EMC -- VMWare's majority stakeholder.

Though analysts say it is highly unlikely that VMWare will stop doing business with HP, it still makes sense to protect itself by buying a virtualization startup or partnering with Microsoft instead.

In terms of databases and storage, HP has long been rumored to be interested in buying Teradata (TDC), the company that Hurd ran before coming to HP. But with a $5.4 billion market cap, it wouldn't come cheap, and a number of analysts say there aren't enough synergies to make the marriage work.

A Teradata purchase would better position them to fight with database leader Oracle (ORCL, Fortune 500). But does it make sense to go after Oracle?

"HP really has its hands full with integrating 3Com and Palm," said Kelleher. "I don't see them pivoting towards a fight with Oracle, especially since HP has really made an concerted effort to take on Cisco."

Also, as HP continues to expand, it has to keep many balls in the air at the same time. Though the company tries to use its size to its advantage with its customers by advertising itself as a one-stop-shop, it also has the challenge of doing all of those things well.

"'One stop shop' very rarely means 'best of breed,'" said Howe. "HP has to produce a lot of very good offerings very different from how a start-up operates, and it's very difficult to do."