HP (HPQ)

Personal computing and printing company HP (NYSE:HPQ) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 3.3% year on year to $13.22 billion. Its non-GAAP profit of $0.71 per share was 11.6% below analysts’ consensus estimates.

Company Overview

Born from the legendary Silicon Valley garage startup founded by Bill Hewlett and Dave Packard in 1939, HP (NYSE:HPQ) designs and sells personal computers, printers, and related technology products and services to consumers, businesses, and enterprises worldwide.

The Hardware & Infrastructure sector will be buoyed by demand related to AI adoption, cloud computing expansion, and the need for more efficient data storage and processing solutions. Companies with tech offerings such as servers, switches, and storage solutions are well-positioned in our new hybrid working and IT world. On the other hand, headwinds include ongoing supply chain disruptions, rising component costs, and intensifying competition from cloud-native and hyperscale providers reducing reliance on traditional hardware. Additionally, regulatory scrutiny over data sovereignty, cybersecurity standards, and environmental sustainability in hardware manufacturing could increase compliance costs.

HP's main competitors in personal computing include Dell Technologies (NYSE:DELL), Lenovo Group (OTC:LNVGY), Apple (NASDAQ:AAPL), and Acer. In the printing business, HP competes with Canon (NYSE:CAJ), Xerox (NASDAQ:XRX), Brother Industries (OTC:BRTHY), and Epson (OTC:SEKEY).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $54.3 billion in revenue over the past 12 months, HP is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because it’s harder to find incremental growth when you’ve penetrated most of the market. For HP to boost its sales, it likely needs to adjust its prices, launch new offerings, or lean into foreign markets.

As you can see below, HP’s revenue declined by 1% per year over the last five years, a rough starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. HP’s annualized revenue declines of 1.6% over the last two years align with its five-year trend, suggesting its demand has consistently shrunk.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Commercial Personal Systems and Commercial Printing, which are 51.3% and 31.6% of revenue. Over the last two years, HP’s Commercial Personal Systems revenue (desktops, laptops, etc.) averaged 1.1% year-on-year growth. On the other hand, its Commercial Printing revenue (commercial or industrial printers) averaged 3.9% declines.

This quarter, HP reported modest year-on-year revenue growth of 3.3% but beat Wall Street’s estimates by 0.9%.

Looking ahead, sell-side analysts expect revenue to grow 1.4% over the next 12 months. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

HP was profitable over the last five years but held back by its large cost base. Its average operating margin of 7% was weak for a business services business.

Looking at the trend in its profitability, HP’s operating margin might fluctuated slightly but has generally stayed the same over the last five years, which doesn’t help its cause.

This quarter, HP generated an operating profit margin of 4.9%, down 2.5 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

HP’s EPS grew at an unimpressive 6.5% compounded annual growth rate over the last five years. This performance was better than its 1% annualized revenue declines but doesn’t tell us much about its business quality because its operating margin didn’t expand.

Diving into the nuances of HP’s earnings can give us a better understanding of its performance. A five-year view shows that HP has repurchased its stock, shrinking its share count by 33.6%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, HP reported EPS at $0.71, down from $0.82 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects HP’s full-year EPS of $3.21 to grow 12.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

HP has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.5% over the last five years, slightly better than the broader business services sector.

Taking a step back, we can see that HP’s margin dropped by 4.1 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

HP burned through $145 million of cash in Q1, equivalent to a negative 1.1% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although HP hasn’t been the highest-quality company lately because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 57.1%, splendid for a business services business.

HP reported $2.73 billion of cash and $10.74 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $4.67 billion of EBITDA over the last 12 months, we view HP’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $394 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see HP narrowly top analysts’ revenue expectations this quarter. On the other hand, its EPS and EBITDA missed, and it lowered its full-year EPS guidance. Overall, this was a softer quarter. The stock traded down 16.3% to $22.85 immediately after reporting.

Updated: June 22, 2025 at 11:57 PM EDT

Before deciding whether to buy HP or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

HP doesn’t pass our quality test. First off, its revenue has declined over the last five years. And while its scale makes it a trusted partner with negotiating leverage, the downside is its cash profitability fell over the last five years. On top of that, its operating margins are low compared to other business services companies.

HP’s P/E ratio based on the next 12 months is 6.7x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $27.21 on the company (compared to the current share price of $24.08).