AI Innovations And Critical Partnerships Propel Tech Firm Into A Bright Future

Key Takeaways

• HP's focus on innovation and high-value categories with new AI PCs is set to drive revenue growth and higher ASPs in the personal computing segment.
  
• Expansion into AI development tools and partnerships, like with Canva, opens new revenue streams and could increase market share in print and digital solutions.
  
• HP's strategy focusing on market recovery and new technologies might not yield expected profitability and revenue due to uncertain market conditions and competitive pressures.

Catalysts

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

• The introduction of new AI PCs, including industry-leading models with Qualcomm and AMD processors, indicates a focus on high-value categories and innovation, likely to drive increased Average Selling Prices (ASPs) and revenue growth in the personal computing segment.
  
• Enhanced investment in the company's Future Ready program to drive additional structural cost savings, aiming for an 80% exit goal of the 3-year structural cost run rate target, indicates potential for improved operating margins.
  
• Expansion into AI development tools and services, such as the HP AI Studio and incorporation of GenAI trust features, suggests an increase in service-based revenue and higher net margins from software and service offerings.
  
• Partnerships and new ventures, including the collaboration with Canva and securing major deals in the print sector, indicate potential for new revenue streams and increased market share in print and digital solutions.
  
• The $50 million award from the U.S. Department of Commerce to expand HP's microfluidics semiconductor fab shows potential for growth in new technologies and markets, like Life Sciences, which could open up significant new revenue and earnings growth opportunities.

Assumptions

• Analysts are assuming HP's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.3% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $3.42) by about October 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 $3.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 11.8x today. This future PE is lower than the current PE for the US Tech industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 2.48% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Risks

• The slower-than-expected recovery of the print market, leading to a decline in print revenue, could impact overall company profit margins and revenue growth.
  
• Competitive pressures, especially from Japanese competitors benefiting from a weaker yen, may lead to a more aggressive pricing environment, negatively impacting margins in the Print segment.
  
• An increased focus on placing more hardware units in the print market, even if it means lower immediate margins, may not yield the long-term profitability expected if market conditions do not improve as anticipated, thus impacting future earnings.
  
• The reliance on the commercial PC market recovery and a potential future refresh cycle, if delayed or less robust than anticipated, could lead to lower-than-expected revenues in the Personal Systems segment.
  
• Investments in new technologies and innovations, such as AI PCs and the Future Ready program, while essential for long-term growth, may lead to increased operational expenses without a corresponding immediate increase in revenue, potentially impacting net earnings in the short term.

Valuation

• The analysts have a consensus price target of $35.45 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 $42.0, 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 $57.1 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 8.0%.
• Given the current share price of $34.76, the analyst's price target of $35.45 is 1.9% 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.