The Rise and Fall of HP Stock
In early 2022, Warren Buffett’s Berkshire Hathaway made a significant investment in PC and printing giant HP Inc. However, the company’s fortunes quickly took a turn for the worse. Demand for PCs plummeted, causing significant declines in shipments throughout 2022 and 2023. Despite expectations of a market recovery in the fourth quarter, the sales generated were modest in comparison to the size of Berkshire’s stake. Based on the latest filing with the SEC, it appears that Berkshire is on its way to completely divesting from HP. As of November, the company had reduced its HP holdings by 50% compared to September.
PCs: A Competitive Market
Though HP stock appeared affordable last year, the reality is that HP operates in two unattractive business segments. While niches such as gaming PCs and high-end workstations offer opportunities for revenue, mainstream price points offer little differentiation between vendors. An $800 HP laptop is indistinguishable from an $800 laptop from competitors like Dell or Lenovo. In fiscal 2023, PCs and related products accounted for around two-thirds of HP’s revenue, with total revenue experiencing a 14.6% year-over-year decrease. The decline in the personal systems segment was even steeper, at 18.9%. Despite the challenges, HP’s PC business managed to maintain a segment operating margin of 6%, which is relatively high historically.
Printing: A Declining Market
The printing business, although more profitable due to high-margin supplies, has been experiencing a long-term decline in revenue. Fiscal 2023 saw a 4.6% decline in printing revenue, with a segment operating margin of 18.9%. HP attributes this decline to the shift towards hybrid work and fewer people working from offices, resulting in lower printing volumes. Global PC shipments were already in decline before the pandemic, and while there could be some growth in the long run, it is expected to be slow. In a highly competitive industry, HP will face challenges in maintaining its margins. Printing currently contributes the majority of HP’s operating profit, but it is not a growth business. Sales of HP’s high-margin printing supplies will be under pressure due to an estimated 0.5% compound annual decline in global print equipment sales through 2028. The company has given guidance for fiscal 2024, with adjusted earnings per share projected between $3.25 and $3.65 and free cash flow expected to be between $3.1 billion and $3.6 billion. However, there doesn’t appear to be a substantial growth story for HP at present. The company’s primary challenge lies in maintaining margins in two challenging and competitive industries. To its credit, HP has managed to navigate these difficulties reasonably well thus far.