Is HP Stock a Buy Now?

Shares of HP (HPQ -0.11%) dropped 4% during after-hours trading on May 30 following the PC and printer maker's latest earnings report. For the second quarter of fiscal 2023, which ended on April 30, revenue fell 22% year over year to $12.9 billion and missed analysts' estimates by $130 million. Its adjusted earnings per share (EPS) declined 26% to $0.80 but still cleared the consensus forecast by $0.04.

HP's headline numbers were disappointing, but they weren't too surprising. It experienced a growth spurt during the pandemic as more consumers purchased new PCs for remote work, online classes, and video games, but those tailwinds dissipated in a post-pandemic world.

Its commercial PC and printing businesses offset some of that post-pandemic slowdown as companies upgraded their hardware again, but that recovery was disrupted by macro headwinds over the past year.

Image source: Getty Images.

HP is still suffering a cyclical slowdown, but its stock has already slumped more than 20% over the past 12 months and trades at just 9 times its projected EPS for fiscal 2023. It also pays a decent forward dividend yield of 3.4%. Should investors buy HP as a defensive income play as the bear market drags on?

Has HP reached its cyclical trough yet?

HP generated 64% of its revenue from its personal-systems unit -- which sells desktops, notebooks, and workstations -- in the second quarter. The other 36% came from its printing unit, which sells printers, supplies, and supply subscriptions. Both businesses shrank over the past years and caused its revenue to wither year over year for four consecutive quarters.

Data source: HP. YOY = year over year.

In the second quarter, HP's personal-systems unit struggled with declining sales of consumer and commercial PCs. Its commercial printing revenue rose slightly, but its declining sales of consumer printers and supplies offset that growth.

During the conference call, CEO Enrique Lores said HP continues to face "industrywide headwinds" that were impacting its "core and growth markets." That slowdown was exacerbated by currency headwinds, which reduced its reported growth in personal systems and printing revenue by 4 and 3 percentage points, respectively, during the quarter. 

HP didn't provide any exact revenue guidance, but Lores expects "second half performance to be stronger than the first half" as its personal-systems division benefits from its "improved channel inventory and seasonality."

That outlook is roughly in line with analysts' expectations for a 7% year-over-year revenue decline in the third quarter and a 12% drop for the full year. In other words, HP hasn't reached its cyclical trough yet, but it might reach that nadir by the end of the year.

Streamlining its business through the slowdown

Instead of sitting around waiting for the PC and printing markets to bottom out, HP has been aggressively cutting costs and streamlining its business through its Future Ready Transformation Plan, which it unveiled last November.

Under that plan, HP is digitizing its business processes to optimize its productivity and reduce its operating expenses. It's also reducing its total number of unique PC models while rolling out newer products for the higher-growth markets in hybrid work, gaming, industrial graphics, and 3D printing. To lock in more customers, it's expanding its subscription-based ecosystem (beyond its Instant Ink service) with new subscriptions for paper, printing hardware, and hybrid work devices.

As part of that restructuring, HP plans to reduce its head count by 4,000 to 6,000 employees (7% to 10% of its current workforce) by the end of fiscal 2025. It will also temporarily reduce its buybacks to free up more cash for its optimization plans.

HP's adjusted operating margin contracted 10 basis points year over year to 8.7% in the second quarter, but that still marked a sequential expansion of 90 basis points from the first quarter. But despite that stabilization, HP still expects its adjusted EPS to decline 13% to 22% year over year in the third quarter and 14% to 19% for the full year.

Should you buy HP before its business recovers?

HP's low valuation and high yield should limit its downside potential, but it won't rally until this downturn ends and its revenue and profits start rising again. Until that happens, it's easy to find other blue chip tech companies that are also trading at low valuations but generating stronger growth than HP.

For example, Cisco (CSCO 0.37%) trades at 12 times forward earnings and pays a forward yield of 3.1%, and it's growing its revenue and profits. IBM (IBM 0.16%), which is also growing again after divesting Kyndryl (KD 2.70%) in late 2021, trades at 13 times forward earnings and pays an even higher forward dividend yield of 5.2%.

Therefore, HP isn't a terrible stock, but I can't recommend buying it right now when so many other higher-quality blue chip tech stocks are still on sale.