HP (HPQ 0.58%) is a household name, as just about every home has, or has had at one point, an HP computer, laptop, or printer. But the stock has struggled recently, trading down about 34% in the past 12 months and almost 13% year to date.
Inconsistent earnings and flat revenue have led to several recent earnings misses for HP. While personal computer sales have been solid, HP has seen a drop in printer sales as people move toward digital.
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In addition, HP has been saddled with higher expenses, in part due to tariffs on components, relocating manufacturing to lower-tariff areas, and rising costs for memory components.
Due to the high memory demand from artificial intelligence (AI), memory accounts for more of the PC build than it has in the past, about 35%, double what it was just a few quarters ago. On top of that, the cost of memory components has been rising because of the demand and supply shortage.
Combined, these factors have increased costs for HP and been a drag on earnings. They caused the company to project earnings to be at the lower end of its guidance range for this fiscal year.
Key Data Points
The bull case for HP
These factors have soured not only investors on HP, but Wall Street analysts as well. The stock has a median price target of $19 per share, which is essentially where it is now. Further, some 32% of analysts say "sell," as opposed to just 21% who rate it as a buy.
But there are a couple of reasons why the majority of analysts may be wrong. For starters, the stock is dirt cheap, trading at just 7 times earnings and 6 times forward earnings.
Second, HP is an elite dividend stock. It pays out a super-high yield of 6.2%, which is about as high a yield as you'll find with any outfit that's not a real estate investment trust (REIT) or business development company (BDC). It has also been a consistent dividend payer, increasing its dividend annually for 15 years in a row. Further, it has an excellent payout ratio of 36%, so it's not extending to fund its dividend.
In this difficult market environment, where many stocks are overvalued, the dividend alone would be a good reason to buy HP stock. But I also think that HP's earnings will start to turn upward toward the end of 2026 into 2027. Among the reasons, HP announced late last year a plan to reduce expenses by approximately $1 billion by the end of fiscal 2028, with about $250 million saved in fiscal 2026.
In addition, there are two forces that could drive revenue higher in the next few years. One is an expected upgrade cycle, due in part to the new Windows 11 systems, but also because its been about five years since the last massive upgrade cycle in 2020-2021 -- and that's typically the lifespan of a PC.
Second, HP is leaning into the new AI personal computers, which accounted for 35% of shipments in the last quarter, up from 25% six months earlier. Analysts say that AI PC shipments could reach 55% by the end of 2026.
These PCs typically carry higher selling prices, and combined with efforts to mitigate the surge in memory prices, could start to deliver solid earnings gains for HP.
