The state of the PC market worsened in the fourth quarter of 2022. While global shipments plunged 19.5% year over year in the third quarter, according to Gartner, Q4 saw a larger 28.5% drop from the prior-year period. That's the largest quarterly decline Gartner has ever recorded since it's been tracking shipment figures.
HP (HPQ -0.36%) managed to maintain its market share, claiming 20.2% of global shipments and securing the No. 2 spot behind Lenovo. But the company shipped just 13.2 million PCs in Q4, the worst performance for the company since at least 2007.
Chart by author. Data source: Gartner.
Expect HP's profits to plunge
2021 was a bumper year for the PC industry. HP shipped 74.2 million PCs, including 18.7 million in Q4 alone. That year marked a resurgence for an industry that had been in a slow-motion decline for years leading up to the pandemic.
Not only did shipments soar, but so did HP's profits. On $43.4 billion of revenue in its personal-systems segment in fiscal 2021, HP generated adjusted operating income of $3.1 billion. Revenue was up 11.2% year over year, while operating profit was up 34%. Segment operating margin was 7.2%, historically high for a business that is usually not nearly as lucrative.
An unprecedented drop in PC shipments in Q4 will drive down HP's PC profits, and that decline will be exacerbated by weakness in the commercial portion of the market. Consumer PC demand was starting to falter toward the end of 2021, but strong demand for commercial PCs helped prop up the industry and HP's results. In Q4 2021, while consumer PC revenue was down 3% year over year, commercial PC revenue soared 25% year over year.
As Gartner explained in its update, PC demand from enterprises deteriorated significantly in the second half of 2022. Companies are keeping PCs longer and pushing back upgrades, and Gartner doesn't expect a return to growth until 2024.
On top of weak end-market demand from consumers and businesses, excess inventory has built up in the supply chain as demand slumped. Until inventories are brought back to healthy levels, HP's PC business will likely perform worse than end-market demand would dictate.
A risky stock
HP has spent the past two years hurling money at shareholders in the form of share buybacks and dividends. Share buybacks are up more than $10 billion in fiscal 2021 and 2022 combined, and dividends consumed another $2 billion. HP has financed a portion of this spending with debt. At the end of fiscal 2022, HP had $3.2 billion in cash and $11.2 billion in debt.
HP said in November that it expected to generate at least $3 billion in free cash flow in fiscal 2023, but given how rapidly the PC market has deteriorated, that outlook may be too optimistic. The lucrative commercial PC market is in decline, and that likely means that the printing business will be under pressure as well, as companies look to slash costs wherever they can.
HP is valued at about $28 billion, which puts the price-to-free cash flow ratio below 10 based on the company's guidance. That may appear cheap, but it seems somewhat likely that HP will slash that guidance when it next reports results, given how poorly the PC market is performing. The possibility of a much worse 2023 than HP initially predicted coupled with a debt-heavy balance sheet makes HP a risky stock.
