Please ensure Javascript is enabled for purposes of website accessibility

Why HP Stock Just Dropped 12%

By Rich Smith – May 28, 2020 at 11:29AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

HP crushed earnings estimates in Q2. What's wrong with that?

What happened

Shares of PC and printers maker HP (HPQ 1.32%) -- the artist formerly known as Hewlett-Packard -- are down 12.4% as of 11:05 a.m. EDT despite last night's report of a big earnings beat.  

Reporting after close of trading, HP said it earned $0.53 per share, GAAP, in its fiscal Q2 2020, well ahead of its guided range of earnings from $0.46 to $0.50, and much better than the $0.45 per share (pro forma) that Wall Street had forecast. Sales for the quarter, however, were only $12.5 billion, below the consensus expectation of $12.8 billion.  

Cartoon characters confused by stock chart arrow falling and crashing into floor

Image source: Getty Images.

So what

I don't think it's that "sales miss," however, that's dragging HP stock down this morning -- certainly not if the company managed to beat on earnings so soundly despite the lower-than-expected sales.

True, sales declined 11% year over year in Q2, but earnings per share were up 4%, boosted by workers buying computer equipment to furnish their home offices during the Great Lockdown.

Rather, what has investors worried about HP is the prospect that business will deteriorate in Q3, now that all those work-from-homers have finished buying what they need to work from home -- or even no longer need their equipment as shelter-in-place orders are lifted across the country.

Now what

In its guidance yesterday, HP predicted that Q3 earnings will fall somewhere between $0.35 and $0.41 per share on a GAAP basis and range from $0.39 to $0.45 per share on a pro forma basis. All of these numbers, however, fall short of the $0.49-per-share pro forma earnings that Wall Street has been telling investors to expect.

I fear that HP's admission that the momentum it enjoyed in Q2 won't extend into Q3 -- i.e., that it is not really a growth stock -- is what's dragging the stock down today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

HP Inc. Stock Quote
HP Inc.
$25.37 (1.32%) $0.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.