HP Inc

HP reported record fiscal third-quarter net revenue of $15.7 billion, a 12.5% year-over-year increase, while non-GAAP diluted earnings per share of $0.83 easily exceeded guidance and FactSet consensus, albeit tariff refunds contributed $0.11.

Why it matters: HP continues to increase revenue year over year, despite declining volume, through steep price hikes and a more premium mix shift. While these levers maintain top-line growth, memory inflation remains a key concern as gross margin shrank to 18.8% with further contraction expected next quarter. While personal systems grew 18% year over year, volume declined 16% and segment operating margin fell 80 basis points. Management guided that revenue will be below seasonal levels next quarter, suggesting there may have been some demand pull-through in anticipation of further price hikes. Printing continued its structural decline, with revenue down 2.2% year over year. However, segment operating margin increased 110 basis points due to pricing actions and tariff refunds.

The bottom line: We are increasing our fair value estimate for no-moat HP to $28 per share from $24 to reflect increases in our revenue forecast assumptions, as price hikes were stronger than we anticipated. We thought the shares were cheap in February through April. With the recent runup, we believed the stock was pricey heading into earnings. After a 4% drop after the earnings release, we see the shares as fairly valued again. The beat this quarter was large, but when normalizing for tariff refund benefits, the implied outlook for the fourth quarter actually softened slightly.

Big picture: While we still await Dell’s results, third-quarter results marked yet another period where HP lost share to Lenovo, which broadly maintained volume year over year.

We still see uncertainty regarding future memory pricing and the ability to raise prices, and therefore uncertainty regarding future margins. We thought that management’s somewhat vague commentary regarding 2027 margin progression was emblematic of this uncertain environment.

AI PCs represented 46% of the mix in the third quarter and are expected to reach 60%-70% of the mix in 2027. While we remain skeptical of the margin benefit of these products, their higher average selling prices have allowed HPs to beat our revenue expectations despite lower volume.

Our fair value estimate is $28 per share. Our valuation implies a fiscal 2027 adjusted price/earnings multiple of 9.6 times compared with its historical average of roughly 8-9. We also forecast a fiscal 2026 free cash flow yield of 14%.

Ultimately, we view HP as a slow-growing, middling-margin, high-cash-flow business that should repurchase material amounts of shares in the future while also sporting a decent dividend yield. The lower growth leads to lower implied multiples. However, we expect healthy share repurchases to lead to a compound annual growth rate for earnings per share of 1% over the next five years, despite minimal revenue and net income growth.

One of the key debates for HP remains what future growth prospects look like. We expect changes in growth expectations (either deterioration or an unexpected improvement) will be key drivers of the stock’s value and will depend on the health and longevity of the printer business and the existence, or lack, of any structural improvements in demand for PCs. An emerging debate centers on memory pricing and its implications for margins and demand destruction as PCs become more expensive. As we model these dynamics out, we still think the company will achieve a fairly consistent free cash flow run rate of $2.8 billion-$3.3 billion over time.

We forecast a 2% sales compound annual growth rate through fiscal 2030, largely driven by PC price hikes. HP saw a boost in demand in 2021 and 2022 during the pandemic, and 2023 was the natural hangover from the demand pull-forward. While some recovery occurred in 2025, driven by a PC refresh cycle, we expect this will have largely played out as we exit 2026. We do not expect the company to get back to 2021 or 2022 revenue levels any time soon.

We expect HP’s personal systems segment to see only a 3% revenue CAGR through 2030, driven by minimal to negative unit growth offset by price increases. We anticipate the long-term decline in printing to continue and forecast a negative 2% CAGR. Even with the potential for certain parts of the PC business to see outsize growth, such as gaming or AI-enabled PCs, we do not see this altering the long-term trends or overall economics of the PC business. We estimate printing will decline modestly over our forecast, roughly in line with the broader market, and any acceleration in this deterioration would be a negative to our fair value.

For our stage two assumptions, we model negative growth for the decade after 2030 to simulate a continued decline in printing and minimal structural changes in PC demand, leading to a mid-8 forward P/E multiple, in line with historical patterns.

We are modeling in a somewhat permanent, slight drag on gross margins driven by higher memory prices. Margins can improve slightly during high-demand periods, such as during the pandemic, but over the long term, we expect operating margins to remain stuck just under 6% and gross margins to remain closer to 19%.

We assign HP a no-moat rating. While HP’s returns on invested capital are surprisingly good for a competitive industry selling commoditized products, coming in at roughly 20%, we do not have the necessary confidence that these returns will persist for the next decade.

HP is one of the three largest personal computer sellers in the world, which combined control roughly 60% of the market. Nonetheless, PCs remain a commodified business. The primary differentiators between PCs are factors such as the amount of memory or the speed of the processor, and all these components are modular and produced by third parties. HP and its competitors are more like PC sellers, not PC makers, as most PCs are made by third parties, primarily by companies based out of Taiwan, in factories in China, and other parts of the world. HP and its competitors order computers from these companies, and then take care of the distribution and selling. Because of this dynamic, with all major PC companies using the same suppliers, there is little differentiation between PCs made by HP or its top two competitors, Lenovo and Dell.

We think understanding the supply chain is the key to understanding HP. The company is primarily involved in the distribution business, selling PCs via its brand around the world. HP helps coordinate a global supply chain and sells relevant PC products across the globe into appropriate end markets via its global brand and distribution know-how.

Because HP is primarily a distributor of PCs, it can operate a very capital-light business. HP has mastered having a working capital base that is as efficient as possible. We calculate roughly negative 50-55 days of working capital, on average, meaning HP carries low inventory and gets paid first before it then pays its own vendors later. In fact, working capital is so efficient that we calculate it reduces the company’s invested capital base by roughly 60%, excluding goodwill. This explains why the company is able to earn decent returns on invested capital. It has an extremely efficient invested capital base, which helps offset being in a low-margin business, with operating margins of 5%-7% for the PC business.

Because of these dynamics, we think HP actually presents a more nuanced moat situation than many investors would recognize at first blush. From a moat perspective, having such an efficient working capital base is a positive sign and generally shows HP has at least some bargaining power within the supply chain when it comes to payment terms. The actual manufacturers of the PCs typically have operating margins of 1%-3%, ROICs of sub-10%, and positive net working capital. These metrics are all worse than HP and show that it wields some power in the supply chain and extracts a bit more value than the actual manufacturers/assemblers of the PCs.

We think HP’s brand and distributional know-how are worth something. Corporates, the primary purchasers of PCs, which make up roughly two-thirds of HP’s PC sales, are more likely to buy from established brands with the scale and established reliability to service their more complex needs. It is also not easy to coordinate a global supply chain. HP’s position as one of the largest sellers of PCs means it has established relationships with key members of the supply chain. This means HP, along with the handful of large established PC sellers, will have a spot in line when it comes to ordering items for their PCs (processors, memory, and so on). This does give some power to HP in the PC industry.

However, we still view competition as high and the future growth of PC sales as uncertain, and fundamentally, this remains a low-margin business, all of which erodes our confidence in awarding HP a moat. The PC industry is mature, with growth primarily driven by replacement cycles, and the number of PCs shipped has declined over the last decade. Competition remains high for this existing revenue, with Dell and Lenovo both having a comparable share to HP. Acer and Asustek, although smaller than the Big Three, also remain competitive. Fundamentally, this is an industry where the main players all use the same suppliers and where they have no true pricing power, even if there are ways (through an efficient working capital base and good execution) to earn ROICs that outshine the fundamental margins of the business.

The other part of HP’s business is its printer division. HP has a long history in the printing industry, designing and making cutting-edge printers. The printer industry is in the decline phase of its lifecycle, with printer sales generally declining by a low single-digit percentage annually.

Margins for the printer division are better than the PC division, coming in at roughly 17%-19%. Even so, we again find it is hard to truly differentiate oneself in this industry. In the '80s and '90s, HP was certainly able to differentiate its printing franchise through innovation, but as the industry has matured, it has become more difficult to maintain a differentiated performance lead. As such, we view printers as commodified, with no pricing power. In fact, HP sells the physical printers at a loss, with profits coming from the printing supplies that are sold thereafter.

On the positive side, with decent margins and a slow decline, HP should continue to earn decent cash flows from this business for the foreseeable future. However, given the potential for an accelerated decline and potentially deteriorating margins from this decline, along with the difficulty of selling a differentiated product that results in pricing power, we are hesitant to award this segment a moat.

HP generates steady free cash flow and returns this cash to shareholders via dividends and buybacks. High cash flow and low future expectations are not a bad combination.

If AI-enabled PCs take off, it could spur the next major PC refresh cycle and even structurally boost demand for PCs.

HP's shares are relatively cheap on multiple valuation metrics. Steady cash flow returned to shareholders combined with a reasonable valuation can lead to good outcomes for shareholders.

HP’s core industries, PCs and printers, are low-growth and low-margin. It is hard to get excited about this business mix or know where future upside could come from.

Tariffs and supply chain restrictions could hurt PC sellers, as will higher memory prices.

Even if AI-enabled PCs take off, the economic profits will mostly flow to the differentiated hardware providers, mainly chip providers and software developers, while the PC sellers will remain low-margin businesses.