The bears and bulls are butting heads regarding HP (HPQ 1.55%). The bears are saying the outlook for HP's bread-and-butter PC (personal computer) market is dire. The bulls are saying the company is making moves that could win the long game.
One of those HP bulls is Warren Buffett's Berkshire Hathaway, which disclosed it built a position in the stock during the first quarter of this year. The firm paid roughly $4.2 billion for 121 million shares. The investment gives Berkshire an 11.4% stake in the company, making it one of HP's largest shareholders.
Here's a look at both sides of the HP argument.
The bear case
The PC market is cyclical, typically ebbing and flowing with technological advancements of computers. The last upcycle -- driven by work-from-home demand early in the pandemic -- was significantly different from the previous ones, though. Folks started working from home at the onset of the COVID-19 pandemic and as it wore on, the work-from-home and hybrid workforce became more prevalent. That caused a surge in demand for laptops.
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HP benefited handsomely. In its fiscal year ending in October 2021, HP reported $63.5 billion in revenue and $6.5 billion in net income. Both were high-water marks since HP spun off Hewlett Packard Enterprise in 2015.
The bears surmise, though, that all good things must come to an end, especially in a volatile industry like PCs. With all those shiny new computers on the market, owners might not need to replace them for some time. Combined with ongoing macroeconomic concerns, the outlook for PC sales has diminished.
And investors can see glum news written on the wall when looking at what PC chip suppliers have had to say. In its second-quarter earnings call, Intel CEO Pat Gelsinger said that as a result of macro weakness, it now expects the PC total addressable market to decline about 10% this year. Samsung Electronics struck a similar tone when it said chip demand from PC makers would weaken further in the second half of the year.
The bull case
The bulls, on the other hand, are taking the long view and believe that even if PC demand cycles down in the near term, it will eventually recover. They may also see a brighter future for HP after its acquisition of audio and video conferencing company Poly, which closed on Aug. 29. The company makes headsets, screens, cameras, and sound systems which can be used by remote and hybrid workforces. Together with HP's personal computers, the merged company will offer a compelling lineup for any work environment. By doing business with a single vendor, companies can save time and money, and be confident that their entire system is in sync. That could be a significant differentiating factor when HP competes for large deals.
HP estimates the workforce solutions market can grow at an 8% compound annual growth rate. In addition, it says it can carve out $500 million in cost savings and boost its operating margin by 6 percentage points by 2025 through merging the companies.
Which case wins?
HP is optimistic about demand. The company says, for instance, that roughly 400 million Windows 10 PCs that are more than 4 years old and will soon need to be replaced. In the most recent conference call with analysts, CEO Enrique J. Lores noted demand softness and supply chain issues, but said:
Like all economic downturns, we also believe that the current situation is temporary. And just as market conditions deteriorated quickly, they could also rebound quickly. ... Hybrid work is here to stay. Gaming will continue to grow in popularity. The rise of digital services and subscriptions is unlocking new business models. And industrial markets are being disrupted by new technologies. These are long-term secular trends. Each of them plays to HP's strength.
Buffett is a steadfast long-term investor and falls in line with the bull case, which looks out much further than the bear case. The company also has a long history of share buybacks, a favorite practice of Buffett's. After its recently reported fiscal Q3, HP has roughly $2.9 billion remaining on its current buyback authorization. The bulls have it on this one, and now is a great time to invest alongside one of the world's foremost stock pickers.
