What happened
Shares of HP (HPQ -0.46%) were down by 7% as of 1:21 p.m. ET Wednesday after the company delivered its fiscal third-quarter results after the close Tuesday afternoon, reporting declining revenue and earnings per share.
For the period, which ended July 31, revenue was down nearly 10% year over year on a reported basis, but down just 7.4% when factoring out the impacts of foreign currency exchange rate shifts. But adjusted earnings per share were down 17% over the year-ago quarter due to lower margins across the printing and personal computing systems segments.
So what
HP said it gained market share in the PC segment in the quarter, with revenue in personal systems up 9% over the previous quarter. But the weak environment for PC sales is weighing on the company's performance. Industrywide, global PC shipments fell 13% in the second quarter, according to IDC.
Management is confident in the company's long-term growth trajectory. Most notably, they see opportunities to grow sales of gaming products such as headsets and memory chips used in gaming PCs. The gaming business grew at a double-digit percentage from the previous quarter.
Another business that is gaining traction is consumer subscriptions, where HP's Instant Paper add-on service is expanding to the U.K., Germany, and France. This business grew revenue both year over year and over the previous quarter.
While the sequential revenue growth is a sign that the demand for PCs could be stabilizing after a rough year, investors were disappointed in the company's earnings guidance. Management is calling for adjusted earnings to come in between $3.23 to $3.35 for the fiscal year, which is lower than Wall Street's estimated range of $3.30 to $3.50.
Now what
The stock now trades at a forward price-to-earnings ratio of 8.5 and offers an above-average dividend yield of 2.74%. But investors need to be wary of falling into a value trap here. While gaming and subscriptions are showing promise as growth opportunities, the company is still exposed to declining sales in its printing business as more people use mobile devices to view and manage documents.
