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Why HP Stock Just Dropped 12%

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

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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.

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