HP (HPQ +8.05%) posted its latest earnings report on Nov. 21. For the fourth quarter of fiscal 2023, which ended on Oct. 31, the PC and printer maker's revenue declined 7% year over year to $13.82 billion and missed analysts' estimates by $40 million. However, its adjusted earnings per share (EPS) rose 10% to $0.90 and matched the consensus forecast.
HP's sales are still declining as it struggles with the PC market's post-pandemic slowdown, but could that cyclical downturn end over the next few quarters? Let's review its turnaround plans to see whether its stock can head higher in a year.
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Another quarter of declining revenue
During the fourth quarter, HP generated 68% of its revenue from its personal systems segment, which sells its PCs and workstations. The remaining 32% came from its printing business, which sells printers and printing supplies.
HP's personal systems revenue has declined year over year for six consecutive quarters, while its printing revenue has tumbled for seven straight quarters. HP's total revenue has fallen for six consecutive quarters.
|
Segment |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Personal Systems Revenue Growth (YOY) |
(13%) |
(24%) |
(29%) |
(11%) |
(8%) |
|
Printing Revenue Growth (YOY) |
(7%) |
(5%) |
(5%) |
(7%) |
(3%) |
|
Total Revenue Growth (YOY) |
(11%) |
(19%) |
(22%) |
(10%) |
(7%) |
Data source: HP. YOY = year over year.
HP's consumer-facing PC sales rose throughout the pandemic as consumers bought new systems for online classes, remote work, and gaming. Many consumers also purchased new printers to print documents and DIY projects at home. Its robust sales of consumer systems also offset its slower sales of commercial systems during the pandemic.
HP had originally expected a rebound in its commercial sales to offset its post-pandemic slowdown in consumer sales. Unfortunately, inflation, rising interest rates, and other macro headwinds prevented its commercial business from recovering.
Has HP reached its cyclical trough yet?
HP's revenue is still shrinking on a year-over-year basis. But on a sequential basis, its personal systems revenue actually rose 5% from the third quarter and notched its second consecutive quarter of sequential growth.
During the conference call, CEO Enrique Lores predicted the PC market would "start a new cycle of market expansion and refresh" as new PCs optimized for Windows 11 and artificial intelligence (AI) applications hit the market.
During its analyst day presentation in October, HP predicted that the total addressable market for PCs could still grow a compound annual growth rate (CAGR) of 4.4% from calendar 2023 to 2026. IDC expects global PC shipments to rise roughly 4% in 2024. Those forecasts imply the PC market's challenges are merely cyclical instead of existential.
HP's printing revenue also rose 4% sequentially in the fourth quarter, compared to a sequential decline in the third quarter, as its sales of pricier printers and the growth of its Instant Ink subscription service offset its flat growth in shipments.
Key Data Points
HP's sequential growth rates suggest it's finally reached the trough of its cyclical downturn. It didn't provide any clear guidance for its revenue, but it expects its adjusted EPS to rise 1%-15% year over year in the first quarter of fiscal 2024 and land between a 1% decline to 11% growth for the full year.
Analysts expect HP's revenue and adjusted EPS to grow 5% and 9%, respectively, in fiscal 2024. At roughly $29, HP trades at just 8 times forward earnings and pays a forward yield of 3.8%. That low valuation and high yield should limit its downside potential as investors wait for the PC and printing markets to grow again.
HP also remains committed to executing the "Future Ready Transformation Plan" unveiled last November. Through that plan, it plans to lay off 7%-10% of its workforce by the end of fiscal 2025; streamline its PC portfolio with fewer unique models; roll out new products for the high-growth hybrid work, gaming, industrial graphics, and 3D printing markets; and introduce additional subscription-based services to lock in its customers and expand its gross margins.
Where will HP's stock be in a year?
HP's stabilization is unsurprising since we've already seen PC-oriented chipmakers, like Intel and AMD, hit similar inflection points in their latest quarters. Based on that recovery and its low valuations, I believe HP's stock will head higher over the next 12 months as more investors pay attention to its cyclical recovery.
