UPDATE: Hewlett-Packard Shares At 6-Year Low On Transformation Worries

Hewlett-Packard Co. (HPQ) shares fell to their lowest level in six years as Wall Street's confidence in the Silicon Valley giant was shaken by management's dramatic restructuring plans and the company again reducing its financial outlook.

Shares recently tumbled 20% to $23.50, erasing more than $12 billion of the company's market value. H-P's stock hit a low of $22.75 Friday, its worst point since summer 2005 and 54% lower than the year high set in February.

Thursday, H-P announced it will get out of computers and mobile devices--a seemingly sharp reversal from management's previous comments--and make a big bet on software with a deal seen as pricey by some. The company also lowered its financial forecast for the third time this year, citing weak spending by consumers and governments as well as supply issues in its printing business resulting from the earthquake in Japan.

The combination of H-P's reduced outlook and the uncertainty over its pending transformation is causing investors to bail on a company perceived to be in a multiyear restructuring.

"H-P may have eroded what remained of Wall Street's confidence in the company and its strategy," said Needham analyst Richard Kugele, who downgraded the stock to underperform. "We can't help but get the sense that these dramatic moves are being made from a position of weakness and not strength, and have an air of desperation to them."

Auriga analyst Kevin Hunt, in a research note titled "What a Mess!", admits that H-P is cheap by traditional standards but says things are likely to get worse before they get better, so "avoid the value trap."

President and Chief Executive Leo Apotheker, in predicting a weak fourth quarter, said he understood shareholders would be upset, but he wanted to be transparent about the problems H-P is facing and the actions it's taking to resolve them.

"I'm lowering the Q4 guidance to be realistic about where we are and the challenges we are facing," Apotheker said. "These challenges and the transformation we are undertaking will take several quarters to fully resolve. I don't take this action lightly. I know our investors don't like being in this position, and neither do I."

For the fourth quarter, H-P said it expects to report per-share earnings excluding items between $1.12 and $1.16, below the consensus estimate of $1.31, on revenue of $32.1 billion to $32.5 billion, missing the estimate on Thomson Reuters of $34 billion.

H-P's actions are a step in the right direction, analysts said, but it won't be easy going. Customers likely will be hesitant to buy PCs from H-P as it explores the options for the business, and it will take many quarters, if not years, to restructure and ease the uncertainty surrounding the company.

"H-P is better served looking for strategic alternatives for the low-margin PC business and refocusing its efforts on the enterprise," Morgan Stanley analyst Katy Huberty said. "However, several concerns will make it difficult for the stock to work in the near-term."

Huberty said it will be difficult for management to execute divestitures while integrating a large deal and managing deteriorating fundamentals in H-P's services business, its imaging and printing group, and its enterprise servers, storage and networking group.

To expand its software business, H-P agreed to buy U.K. firm Autonomy Corp. (AU.LN AUTNY) for $10.25 billion. Autonomy will help H-P tap into a fast-growing industry that aids customers in searching loads of data, Needham's Kugele said, but it comes "at a steep price" and limits the company's balance sheet flexibility to make future acquisitions.

Auriga's Hunt said the deal's price tag, at roughly 16 times forward revenue and 64 times price-to-earnings, seems "extreme and probably says a lot about the growth prospects of H-P's core software businesses."

"While HP expects the deal to be accretive on an EPS basis, it is massively dilutive to shareholder value if the true cost of capital is considered rather than current cash rates," Hunt said.

H-P also said it was abandoning efforts to sell tablets and smartphones that challenged Apple Inc.'s (AAPL) iPad and iPhone. The company had bought Palm last year to gain its webOS operating system for mobile devices. H-P said its webOS tablet, the TouchPad, hasn't sold as well as expected, despite a sizeable marketing campaign. The company plans to license the operating system, rather than make mobile devices itself.

"This provides yet another example this week of Apple's growing success driving a major transformation in the tech world," Ticonderoga analyst Brian White said.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; [e-mail]

--George Stahl contributed to this article.