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Why You Should Hold Onto Your HP Shares, Even After the Post-Earnings Pop

It would be easy to decide now's the time to sell. HP (NYSE: HPQ) shares are up nearly 50% from their March low, with the last leg of that journey being the surge after a pleasantly surprising second-quarter report. Sales of HP personal computers were even better than expected after tens of thousands of employees were suddenly forced to start working from home. That demand surge clearly won't last, though.

Except it won't exactly start to shrink from here either, at least according to technology market research outfit International Data Corp., or IDC. IDC isn't exactly calling for explosive growth for PCs going forward. But it is saying the multiyear shrinking streak is coming to a close now that tablets and laptops can feasibly be one and the same. HP stands ready to win market share in this next era of personal computing. In fact, it's already shown it's got the right stuff.

Image source: Getty Images.

It's uneven, but growth's in the cards

IDC's expected compounded annual growth rate -- as measured in PC unit sales -- is modeled to be a mere 1.3% between now and the end of 2024.

It's admittedly not a lot. However, it is a distinct turnaround from the PC industry's slow implosion that first took root in 2011, when consumers started to realize tablets like the iPad from Apple (NASDAQ: AAPL) and Samsung's (OTC: SSNLF) handheld devices did all that most people needed done. In unit terms, IDC is calling for the delivery of 360.9 million personal computing devices this year, but forecasting the delivery of 379.9 million devices in 2024.

The forecasted mix of device types, however, will accelerate a trend that's been building for some time. Traditional desktops and even traditional notebooks or laptops will continue to fall out of favor. So-called ultraslims (that generally weigh less than three pounds), 2-in-1 devices, and slate tablets will take center stage. IDC projects that ultraslims will dominate the PC market by 2024, accounting for nearly 117 million of the 380 million units expected to ship that year. That category's growth will also be the biggest from present levels, followed closely by 2-in-1 devices.

HP wins

Enter HP. It's already got solid representation within these critical next-generation categories, like the ENVY x360 that acts as a laptop -- complete with keyboard -- or a tablet. The company's EliteBook 840 G7 Notebook series offers high-power computing without the bulkiness one would normally expect of such machines, weighing in at just under three pounds.

HP did well with these categories during the COVID-affected quarter ending in July too. Notebooks accounted for 51% of the company's top line, with workstations and other types of personal computing systems other than desktops accounting for another 6% of its sales mix. A year ago, those numbers were 39% and 6%, respectively.

And lest you think a smaller revenue tally was the reason HP's notebook business was up a quarter ago, it wasn't. Last quarter's top line was down a very modest 2.1%, with notebook revenue itself growing 30% to keep its overall computing segment ahead of its comps. Printing-related sales was the key culprit. They fell nearly 19% year over year.

That data nugget alone is encouraging, but not necessarily convincing. After all, rivals Lenovo (OTC: LNVGF) and Dell Technologies (NYSE: DELL) are answering the call for more 2-in-1s and ultraslims as well.

The recent global turbulence stemming from the coronavirus pandemic, however, may have revealed a detail that upgrades the bullish argument for HP from merely encouraging to completely convincing. That is, HP gained market share at the expense of Dell and Lenovo during the second quarter. IDC says HP's traditional PC shipments (including notebooks) of 18.08 million units translated into a market share of 25%, up from 23.6% in the same quarter a year earlier. Outside of much smaller personal computing name Apple, HP's 17.7% increase in deliveries was the biggest among the major names in the business.

The data tells us at least one of two things. At the very least, it says HP has a strong enough supply chain to deliver computing hardware despite all the supply constraints cultivated by COVID-19. Second, the number may also tacitly suggest that when forced to make a purchase, consumers and companies opted for the older and seemingly more established HP.

Bottom line

Its growth may never reach high-octane status again, particularly given how its printing division is facing a headwind that may never abate. Even if HP outpaces its peers, IDC's anticipated annual PC market growth of just a little more than 1% per year still doesn't set the stage for a great deal of upside.

What HP lacks in growth potential, however, it makes up for in value and visibility. Newcomers can step into a new position at only around 10 times the company's past and projected earnings, plugging into a personal computing market that isn't going to simply vanish. Consumers as well as workers have to have some way of connecting to the web. HP's been their top choice of late.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.


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