HP’s (HPQ) near-term prospects look bleak as PC slump continues

Weak consumer spending and economic uncertainties are the new challenges facing the PC market which is struggling to recover from a long-drawn slowdown. HP, Inc. (NYSE: HPQ) reported a sharp fall in second-quarter revenues, reflecting the continued weakness in PC demand. Currently, the company is planning to make AI-supported PCs to drive future growth and regain the lost momentum.

HP’s stock suffered a selloff following the earnings announcement this week and is currently trading below its 52-week average. The outlook on the stock, which has mostly traded sideways since last year, is not very encouraging. HPQ is unlikely to make a meaningful recovery in the near future, which makes it a risky investment right now. After the recent losses, the stock has become cheap, but the company’s weak balance sheet – with high debt and softening cash flow – remains a concern.

Headwinds

The top line will likely remain under pressure from the inflation-induced squeeze on personal finances and weak enterprise spending. In the most recent quarter, sales dropped across all operating segments. Though the management is taking steps to incorporate advanced technologies like AI and machine learning into the products, it would take some time for the efforts to yield the desired results.

As the pandemic-induced sales boom waned, PC sales dropped sharply across markets last year and the downtrend is continuing. Though commercial PC sales remained resilient initially, the momentum declined in recent months. HP’s Printing segment, which generates relatively bigger margins, is also facing a slowdown due to muted demand, adding to the sales slump. Under these circumstances, the company might find it difficult to sustain the bottom line going forward.

Margins would likely come under pressure from the unfavorable pricing environment amid stiff competition. While the dip in PC sales is attributable to cyclical factors to some extent, the weakness in the printer business looks secular because hard copies are being widely replaced by digital copies.

“We are equally focused on the opportunities generative AI is starting to create for our PS business. We are actively working with our major software and silicon partners to engineer new architectures that will integrate AI applications into everyday use cases. This is a very exciting opportunity. In the same way, the Internet age fundamentally changed the way people use computers, I believe the age of AI will transform the role PCs play in our lives,” said HP’s CEO Enrique Lores during a recent interaction with analysts.

Key Numbers

In the April quarter, adjusted earnings declined 26% year-over-year to $0.80 per share. Both the operating segments – Personal Systems and Printing – contracted in the three-month period, causing total revenues to fall 22% year-over-year to $12.9 billion. Earnings beat estimates for the second consecutive quarter, while revenues missed.

In a sign that things would improve slightly in the second half of the year, the management issued third-quarter earnings guidance that is above the consensus estimates. Sales should benefit from back-to-school shopping, and later from the holiday season.

HPQ has lost around 26% since peaking a year ago. The stock traded higher on Thursday afternoon, recovering from the post-earnings weakness.