Where Will HP Stock Be in 1 Year?

HP's (HPQ 1.55%) stock price tumbled 6% during after-hours trading on Aug. 30 following the company's third-quarter earnings report. The PC and printer maker's revenue decreased 4% year over year to $14.7 billion, missing analysts' estimates by $970 million. Its adjusted net income dropped 10% to $1.1 billion, but it still plowed $1 billion into buybacks to boost its adjusted EPS by 4% to $1.04, which cleared the consensus forecast by a penny.

Those tepid growth rates weren't surprising, since HP's consumer-facing PC and printing markets -- which both experienced growth spurts during the pandemic as more people worked from home -- face supply chain challenges and cyclical slowdowns in a post-lockdown market. But will HP break out of its rut and reward patient investors over the next 12 months?

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What happened over the past year?

In the third quarter, HP generated 69% of its revenue from its personal systems segment, which sells notebooks, desktops, and workstations. The remaining 31% came from its printing segment, which sells printers and printing supplies. Here's how those two businesses have fared over the past year:

Data source: HP. YOY = Year over year.

As consumer sales of HP's PCs cooled off in a post-lockdown market, the recovery of the commercial market -- which had decelerated during the pandemic -- initially offset that slowdown.

But in the third quarter, the personal systems segment's 20% year-over-year decline in consumer revenue completely eclipsed its 7% growth in commercial revenue. Its total unit shipments tumbled 25%, with a steep 32% drop in notebook shipments offsetting its anemic 1% growth in desktops.

That pressure should persist over the next few quarters, but HP's recent $3.3 billion acquisition of Poly, a provider of video and audio conferencing tools for remote and hybrid workers, might alleviate some of that pressure and strengthen its consumer and commercial PC divisions over the long term.

In the printing segment, its consumer revenue rose 1%, but its commercial revenue decreased 3%. Its higher-margin supplies revenue also dropped 9% as HP continued to struggle against cheaper generic ink and toner brands.

Focusing on its margins and shareholder returns

As HP's core businesses face macro and cyclical headwinds, the company is focusing on stabilizing its operating margins to ride out the storm.

Data source: HP. *Non-GAAP basis.

Its personal systems operating margin still contracted year over year in the third quarter, but it stabilized sequentially as the company reined in its R&D expenses and sold more higher-margin commercial PCs.

Its printing operating margin also expanded both sequentially and year over year -- even as its higher-margin supplies business shrank -- as HP cut costs and sold more expensive printers for the home, office, and industrial markets. The expansion of its Instant Ink subscription service, whose cumulative subscribers and revenue rose by double-digit percentages during the quarter, also helped offset some of that pressure.

Prioritizing shareholder returns and acquisitions

HP's growth is temporarily stalling out, but management remains committed to returning more than 100% of its free cash flow (FCF) to its investors through buybacks and dividends.

Data source: HP.

HP expects its all-cash acquisition of Poly to slightly reduce its full-year FCF from its original range of $3.5 billion-$4 billion to $3.2 billion-$3.7 billion. However, it remains committed to returning all of its FCF to its investors through buybacks, dividends, and acquisitions over the long term.

HP has already reduced its number of outstanding shares by about 40% over the past five years, and it's raised its dividend annually ever since it spun off Hewlett-Packard Enterprise (HPE 0.59%) in 2015. The stock also trades at just seven times forward earnings while paying a hefty forward dividend yield of 3.2%.

Where will HP be in one year?

HP expects its non-GAAP (generally accepted accounting principles) EPS, which will include a $0.05 headwind from Poly's debt-related expenses, to rise 6% to 9% for the full year. It also expects its takeover of Poly to be accretive to its revenue, non-GAAP operating profits, and non-GAAP EPS throughout fiscal 2023.

HP's stable growth rates, low valuation, and high yield should limit the stock's downside potential even as its near-term revenue growth decelerates. It probably won't generate massive gains over the next 12 months, but it should remain stable or gradually advance as rising interest rates and other macro headwinds drive investors toward cheaper dividend stocks.