HP Stock Price Forecast August 2021 – Time to Buy HPQ?

HP Inc. (HPQ) stock is up almost 21% so far in 2021 which is in line with the S&P 500. The stock was however trading lower in premarkets today after its earnings release. Should you buy the dip in HPQ stock?

HP released its fiscal third-quarter 2021 earnings yesterday after the close of US markets. The earnings were a mixed bag though. While its revenues missed estimates, it posted a healthy beat on the bottomline.

HP stock price earnings

HP reported revenues of $15.3 billion in the fiscal third quarter. While the revenues were 7% higher than the corresponding period in 2020, they were well short of the $15.9 billion that analysts polled by Refinitiv were expecting. The company reported sales from personal systems of $10.4 billion in the quarter that ended in July. The sales were similar to the corresponding quarter last year but were 1% lower than the previous quarter.

The PC (personal computer) industry is facing supply-side bottlenecks. There has been a severe chip shortage that has taken a toll on several industries including gadget makers, white good companies, and automakers. While the demand for chips has rebounded over the last year, the supply hasn’t kept pace. There have also been disruptions at some chipmakers which further aggravated the problem.

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Chip shortage

On their part, while chipmakers are investing to ramp up capacity amid the soaring demand for chips amid the digital transformation, these would take time to come online. Micron expects chip shortages to continue into 2022 as well. Talking of HP, while the demand for its PCs is high, it is struggling to meet the demand amid the supply-side bottlenecks. The company said that it is selling everything that it is able to produce.

The PC industry has come a long way over the last year and has transformed from a demand-constrained industry to one which is supply-constrained. Commenting on the chip supply situation, HP CEO Enrique Lores said “We could have grown more if it wasn’t for the shortages of components.”

HP stock is facing a supply bottelneck

He added, “What really we are seeing is strength in demand on the commercial side as offices are reopening. This is really what what we see from a demand perspective — what you see in our numbers is a combination of demand, but it’s mostly driven by supply,”

Meanwhile, printer sales at HP rose 24% year-over-year to $4.9 billion. While HP’s printer segment has been in a chronic decline, sales rebounded in the quarter, albeit from a lower base.

HP stock guidance

HP reported an adjusted EPS of $1 in the quarter which was ahead of its guidance of $0.81-$0.85. The metric also came in ahead of what analysts were expecting. HP expects to post an adjusted EPS between $0.84-$0.90 in the current quarter which was ahead of the $0.80 that analysts were expecting. Meanwhile, the chip supply bottleneck seems to be weighing down HPQ stock and it was trading lower despite earnings beat and better than expected guidance.

HP generated free cash flows of $1 billion in the quarter and paid a dividend of $0.1938 in the quarter which totaled $230 million in absolute terms. It spent another $1.5 billion towards share repurchases in the quarter. The stock has a healthy dividend yield of 2.7% which is higher than that of the S&P 500.

HPQ stock forecast

According to the estimates compiled by MarketBeat, HP has a median target price of $27.64, which is a 5% discount over current prices.

Analysts meanwhile have split ratings on HPQ stock and six of the 11 covering it have rated it as a buy. Three analysts rate the stock as a hold while the remaining two analysts have a sell rating.

HPQ stock should gain from the digital transformation

While thinking about digital transformation, markets often tend to overlook hardware companies like HP. The soaring demand for PCs should benefit companies like HP. While supply bottlenecks might weigh down the sector over the next few quarters, things should revert to normalcy next year.

Earlier this year, Citi had reiterated similar views while upgrading HP stock. “Simply put the one PC for household is no longer the norm and we see annual PC units gong from 250m units to 335-340m units per year. HP has also turned its Chromebook business into a profitable business generally in line with other consumer and corporate PC profit margin percentages,” Citi said in its note.

HP looks reasonably valued

HPQ stock trades at an NTM (next-12 months) PE of 8.7x which is below the five-year average of 9.8x. The valuation discount does not look appropriate considering the current uptick in the PC industry.

Talking about technicals, HPQ stock could test its 50-day SMA (simple moving average) in today’s price action. While it currently trades above the price level, it could slip below the level looking at the pre-market price action. The stock’s 14-day RSI (relative strength index) is 50.9 which is a neutral indicator.

Overall, HPQ looks like a good stock to buy and bet on the structural revival in the PC industry. The stock could also make sense for dividend investors considering its high dividend yield.

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