After initially slipping on lower-than-expected Q3 adjusted EPS and mild Q4 earnings guidance, shares of HP Inc. (HPQ, Financial) have rebounded to levels seen before the early August market correction. The primary issue was HPQ's Printing business, which faced weak demand, an unfavorable geographical mix, and aggressive pricing. These challenges are expected to persist, leading HPQ to project Q4 adjusted EPS of $0.89-0.99, below analyst expectations.
Investors have grown more accepting of HPQ's challenges, mainly because they are confined to the Printing segment, which has been struggling for some time. HPQ is taking steps to address these issues, aiming for additional cost savings next quarter to potentially boost overall non-GAAP operating margins, which fell by 70 bps year-over-year to 8.1% in Q3.
More market attention was drawn to the performance and demand for AI PCs. HPQ shared some positive updates:
- HPQ's overall revenue increased by 2.4% year-over-year to $13.52 billion, surpassing analyst expectations and marking the first positive year-over-year growth in nine quarters, driven entirely by a 5% rise in Personal Systems (PS).
- Consumer PS revenue declined by 1%, while Commercial PS revenue jumped by 8%. Total units shipped rose by 1%, with Commercial PS units improving by 6% compared to a 6% drop in Consumer PS units.
- Commercial PS is leading the PC recovery, supported by organizations refreshing their aging PC lineups. The decline in Consumer PS sales improved from -3% last quarter, showing signs of stabilization, partly due to early demand for AI PCs.
- AI PC shipments are increasing, with initial reactions being overwhelmingly positive. HPQ expects next-gen AI PCs to account for around 50% of total shipments by 2027 and drive an average selling price increase of 5-10%.
Despite being in the early stages, AI PCs are already positively impacting the broader PC recovery. Lingering headwinds in Consumer PS remain a concern, but demand may rise over the next few quarters, especially as Microsoft (MSFT, Financial) releases more AI-related features for Windows 11. Best Buy (BBY, Financial) also noted that the impact of AI is just beginning, with a critical AI feature from MSFT yet to be released. HPQ's optimistic outlook on AI PCs is a positive indicator ahead of Dell's (DELL, Financial) upcoming report.
