HP Inc. Shows Resilience Amid Market Challenges
HP Inc. HPQ has performed steadily with a year-to-date (YTD) increase of 21.1%. However, it lags behind the Zacks Computer – Micro Computers industry’s 28.7% growth, the Technology Select Sector SPDR Fund XLK ETF’s 24.3% return, and the S&P 500’s 27.3% rise. The company’s stock also trails competitors like Apple Inc. AAPL and Dell Technologies Inc. DELL, which gained 28.2% and 61.8%, respectively.
Year-to-Date Price Performance Overview
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This performance gap indicates that HPQ’s growth stems from its specific strengths amidst broader market fluctuations. Their resilience highlights a strategic focus that is paying off.
Investor confidence has been bolstered by HPQ’s ability to adapt in the ever-changing tech landscape, which includes challenges like supply chain issues and reduced demand for personal computers (PCs). The company’s efforts in 2024 emphasize profitability, cost control, and ventures into higher-margin sectors such as managed services and digital printing—a strategy that has allowed it to remain competitive.
Given these insights, holding onto HPQ shares might be the most sensible approach for investors at this time.
HPQ’s Key Business Segment Strengths
HP’s diversification across its business segments has significantly contributed to its overall performance. The Personal Systems segment, which includes PCs and workstations, remains essential for revenue. In the fourth quarter of fiscal 2024, this segment experienced a 2.1% year-over-year revenue increase, driven by a 4% rise in commercial PC shipments.
This segment’s stability is particularly important since the consumer PC market is under pressure from ongoing shifts to remote work and budget constraints affecting corporate IT spending. By focusing on higher-value items like commercial notebooks and workstations, HP aims to offset the profit squeeze from budget consumer PCs.
The Printing segment also reported modest growth in the fourth quarter, with a 0.8% year-over-year increase. HPQ has successfully expanded its printing business, enhancing both hardware and software—like adding security features—which has helped regain market share in a contracting field. This growth, particularly in Consumer Printing (up 3%) and Supplies (up 2%), is crucial for providing a consistent revenue stream that supports the company’s profitability goals.
Strategic Moves for HPQ’s Growth
HPQ is focused on strategic initiatives intended to boost growth in high-margin sectors and diversify its revenue. The company’s move into managed IT services marks a pivotal shift from its traditional hardware base, with revenues in this area increasing 12% in the fourth quarter, reflecting strong demand for HPQ’s IT solutions. This growth aligns well with the rising trend of digital transformation among businesses that need robust IT services.
Furthermore, the growing interest in generative artificial intelligence (AI)-enabled PCs could enhance HP’s sales in the near future. Previously, HP noted that AI PCs could be a significant growth factor starting in the coming year, forecasting that 40-60% of PCs might feature AI technology in the next three years. To capitalize on this trend, HPQ has introduced several AI PCs and intends to expand its offerings further.
HPQ Presents Attractive Valuation
Currently, HP appears to be attractively priced. With a forward 12-month price-to-earnings (P/E) ratio of 10.18, it sits below the industry average of 28.21, suggesting that HPQ stock is trading at a relative discount.
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Current Challenges Facing HPQ
HPQ faces several near-term challenges that may impact its performance. Continued weakness in the global PC market stands out as a primary concern, with Consumer PC shipments declining 3% year over year in the fourth quarter of fiscal 2024, driven by cautious consumer spending amid economic uncertainties. Although the Commercial PC segment has seen growth, its future demand is in question.
The Printing segment also encounters issues, with a 1% drop in Commercial Printing revenues reflecting weaker enterprise demand. While Supplies revenues increased by 2%, their long-term growth potential seems limited due to the rising trend toward digital documentation.
Moreover, HPQ’s cautious forecast for the first quarter of fiscal 2025 indicates ongoing macroeconomic challenges and lengthened sales cycles. Non-GAAP earnings per share are projected between 70 cents and 76 cents, marking a possible year-over-year decline of 6-14%. Analysts are also cautious about HPQ’s near-term earnings growth, resulting in downward adjustments to the Zacks Consensus Estimate.
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Conclusion: Hold HPQ Stock for the Time Being
In light of HPQ’s YTD performance, appealing valuation, and ongoing strategy to diversify, maintaining a hold on the stock appears to be the most reasonable decision. While the company may have underperformed compared to the broader market, its shift toward higher-margin sectors and expanded managed IT services offer a solid path for future growth.
Overall, HPQ’s diversified approach, focus on sustainability, and effective execution present a promising scenario as it tackles immediate challenges and seeks long-term opportunities in IT services and printing sectors. Currently, HPQ has a Zacks Rank of #3 (Hold). You can view the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are those of the author and do not necessarily reflect the opinions of Nasdaq, Inc.
