Is HP Stock a Buy Now?

HP's (HPQ -0.46%) stock fell 7% on Aug. 30 after the PC and printer maker posted its latest earnings report. For the third quarter of fiscal 2023, which ended on July 31, its revenue fell nearly 10% year over year to $13.2 billion and missed analysts' estimates by $200 million. Its adjusted earnings per share (EPS) dropped 17% to $0.86 but matched the consensus forecast.

HP's top and bottom declines weren't surprising, since the PC market is still stuck in a post-pandemic slowdown. However, its weaker-than-expected sales growth and grim near-term outlook suggest it still hasn't reached its cyclical trough yet. Should investors take a chance on HP before that turnaround happens?

Image source: Getty Images.

HP still faces cyclical and macro headwinds

HP's revenue has declined year over year for five consecutive quarters. Its sales of personal systems -- which include laptops, desktops, and workstations -- fell for five straight quarters as its printing sales slumped for six straight quarters.

Data source: HP. YOY = Year-over-year.

HP's PC sales dropped in a post-pandemic market because people were no longer rushing to buy new PCs for online classes, remote work, or high-end games. People who bought new PCs during the pandemic's height also probably won't need to upgrade their systems for at least a few more years. Commercial customers initially bought more PCs after the worst of the pandemic passed, but the macro headwinds over the past year drove many of those businesses to rein in their spending. That's why IDC expects global PC shipments to decline 13.7% to 252 million units in calendar 2023.

But on a sequential basis, HP's personal system sales grew 9% sequentially in the third quarter, mainly driven by its rising sales of gaming PCs. This ended two consecutive quarters of sequential declines. IDC also expects global PC shipments to rise 3.7% to 261.4 million in 2024 -- so its cyclical slowdown could end within the next few quarters.

HP's printing business experienced a similar growth cycle. Its sales of home printers initially rose in the pandemic as more people bought new systems to print documents at home or complete DIY projects. But those sales declined in a post-pandemic market, and the commercial printing market stayed sluggish as companies printed out fewer paper documents and bought fewer printing supplies. Intense competition from generic ink and toner suppliers exacerbated that pain.

The printing segment faces a tougher slowdown. Its revenue fell 10% sequentially in Q3 after two quarters of sequential growth, and newer initiatives like industrial and 3D printing aren't moving the needle yet. But the global printing market could still grow at a compound annual growth rate (CAGR) of 4.7% from 2023 to 2028, according to Mordor Intelligence, so this business isn't facing an existential crisis yet. 

On the bright side, HP's total revenue still grew sequentially in Q3 -- which broke a two-quarter streak of sequential declines -- and it expects its revenue to rise sequentially again in the fourth quarter.

When will HP's cyclical slowdown end?

HP didn't provide any revenue guidance for the full year, but analysts expect a 13% drop. However, HP reduced its full-year adjusted EPS forecast from $3.30 to $3.50 to $3.23 to $3.35, which would represent an 18% to 21% decline from fiscal 2022. It also reduced its full-year free cash flow (FCF) forecast from $3 billion to $3.5 billion to $3 billion.

During the conference call, CEO Enrique Lores attributed those reductions to the "aggressive pricing environment in PCs," "sluggish demand in China," and other headwinds in the enterprise market. Lores also admitted that the "macro situation is not improving as quickly as anticipated."

But instead of fretting too much over that slowdown, HP will keep cutting costs and streamlining its business through the "Future Ready Transformation Plan" it unveiled last November. Through that plan, HP will lay off 7% to 10% of its workforce by the end of fiscal 2025, reduce its number of unique PC models, roll out fresh products for the higher-growth hybrid work, gaming, industrial graphics, and 3D printing markets, and launch more subscription-based services.

Unfortunately, those efforts aren't meaningfully boosting its adjusted operating margins, which dropped 60 basis points year over year (but rose 10 basis points sequentially) to 8.8% in Q3. Those margins will likely remain compressed until its PC and printing sales stabilize.

The valuations and verdict

HP trades at just nine times its adjusted EPS forecast for the full year. It also still pays an attractive forward dividend yield of 3.4%, and it's committed to returning most of its FCF to its investors through dividends and buybacks.

That low valuation and high yield could limit its downside potential, but I don't think HP will attract much attention until its revenue rises gain. So for now, investors who are looking for a high yield should probably just stick with short-term CDs -- which pay risk-free yields of 5% to 6% -- instead of waiting around for HP to finally recover.