AI And Software Investments Will Build Intelligent Ecosystem Across Devices

Key Takeaways

• Strategic AI investments and AI integration across product lines are expected to drive growth, enhance offerings, and improve margins.
  
• Supply chain expansion and cost-saving initiatives aim to mitigate risks and support profitability and reinvestment opportunities.
  
• HP faces geopolitical and pricing challenges impacting margins, while market softness and rising costs threaten revenue and earnings stability despite mitigation efforts.

Catalysts

Provides personal computing, printing, 3D printing, hybrid work, gaming, and other related technologies in the United States and internationally.

• HP's acquisition of strategic assets from Humane and investment in AI and software capabilities are expected to accelerate the company's move toward building an intelligent ecosystem across all HP devices. This has the potential to drive future revenue growth by enhancing their product offerings in AI PCs, smart printers, and connected conference rooms.
  
• The integration of AI technology into HP's product lineup, including AI PCs, Advanced Compute Solutions, and hybrid systems, is anticipated to propel commercial growth, particularly through the expected Windows 11 Refresh. This initiative is projected to support higher average selling prices and improved net margins.
  
• HP's focus on realigning key growth areas toward the Future of Work, including consumer subscriptions and industrial graphics, is expected to be accretive to margins over time. By prioritizing these high-value revenue streams, the company aims to improve overall earnings and drive long-term profitability.
  
• The expansion of HP's global supply chain, reducing reliance on China for production by increasing manufacturing outside China, is aimed to enhance manufacturing resiliency and mitigate geopolitical risks. This strategically positions the company to manage costs more effectively, safeguarding net margins amidst tariff uncertainties.
  
• HP's Future Ready plan is targeting $1.9 billion in gross annual run rate structural savings by fiscal year 2025. These savings are crucial for offsetting macroeconomic uncertainties, allowing HP to reinvest in strategic growth areas and potentially improving net income and earnings per share in the long term.

HP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HP's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $3.71) by about March 2028, up from $2.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.8 billion in earnings, and the most bearish expecting $2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the US Tech industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 3.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

HP Future Earnings Per Share Growth

Risks

• HP's continued exposure to the Chinese market, particularly in the face of geopolitical tensions and new tariffs, could impose additional costs and logistical challenges, potentially impacting net margins.
  
• Despite efforts to diversify manufacturing, the dependency on China as a key hub might lead to vulnerabilities if geopolitical issues escalate, threatening revenue continuity.
  
• The competitive landscape in print, especially concerning pricing pressures from Japanese competitors with currency advantages, might constrain HP's ability to maintain margins in its Print segment.
  
• Softness in the consumer PC market, particularly declines in units sold, indicates vulnerability in that segment and could pressure overall revenue growth if not offset by commercial gains.
  
• Increased commodity costs impacting gross margins have been noted, and even though mitigation strategies are in place, prolonged cost pressures could adversely affect earnings over time.

Valuation

• The analysts have a consensus price target of $35.855 for HP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $57.3 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 8.6%.
• Given the current share price of $28.7, the analyst price target of $35.85 is 20.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.