AI PCs And Windows 11 Transition Will Drive Future Commercial Demand

Key Takeaways

• HP's focus on AI innovations and Windows 11 transition aims to boost revenue, particularly in commercial PCs, by capitalizing on upgrade demands.
  
• Strategic investments in growth areas and structural cost-saving plans are expected to enhance net margins and drive long-term earnings growth.
  
• Rising commodity costs, competitive pricing, geopolitical risks, and reliance on share buybacks challenge HP's earnings growth and margin sustainability.

Catalysts

Provides personal computing and other digital access devices, imaging and printing products, and related technologies, solutions, and services worldwide.

• HP's strategic focus on AI-powered capabilities and innovations, including AI PCs and the HP AI Companion, is expected to drive revenue growth as the penetration of AI PCs in the market increases, particularly in the commercial segment.
  
• The anticipated Windows 11 refresh and its associated transition are expected to boost demand and consequently revenue for HP's commercial PC segment in 2025, driven by the need for enterprises to upgrade from Windows 10.
  
• HP's continued investment in growth areas like consumer services and hybrid systems is expected to contribute to revenue and earnings growth. The company aims to expand its service offerings and increase the number of subscribers.
  
• HP's strategic shift toward commercial and solutions-based products, leveraging its strong portfolio, is expected to enhance net margins and revenue growth, with particular focus on high-value commercial PC and Print segments.
  
• The execution of HP's Future Ready strategy, including structural cost-saving plans and supply chain enhancements, is anticipated to improve net margins and operating profit, setting the stage for a robust growth in earnings per share (EPS) and free cash flow.

HP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HP's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $3.59) by about December 2027, up from $2.8 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $3.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2027 earnings, up from 12.0x today. This future PE is lower than the current PE for the US Tech industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 4.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

HP Future Earnings Per Share Growth

Risks

• HP is facing continued pressure from rising commodity costs, which impacted operating profit in Personal Systems and may constrain future earnings.
  
• The company is operating in a competitive pricing environment, especially in Print, where it has gained share but only at potentially reduced margins, impacting net margins.
  
• HP's forecast for the PC market growth relies heavily on a successful Windows 11 refresh and increased AI PC penetration, both of which are susceptible to market fluctuations in consumer preferences and enterprise spending priorities, thereby affecting revenue.
  
• The upcoming potential changes in tariffs and geopolitical challenges present a risk to HP's supply chain and cost management, which could impact net margins and earnings adversely if not managed effectively.
  
• The company's financial results appear partially driven by share buybacks, suggesting organic operating income might be relatively flat year-over-year despite future-ready strategic initiatives, potentially affecting earnings sustainability.

Valuation

• The analysts have a consensus price target of $36.24 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 2027, revenues will be $56.9 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $34.55, the analyst's price target of $36.24 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.