HP gets upgrade at HSBC on positive sector dynamics, expanding margins

HSBC upgraded HP (NYSE:HPQ) to Buy from Hold citing positive sector dynamics and expanding margins.

The firm also raised the price target on the shares to $33 from $30.

The analysts said that global personal computer, or PC, market returned to a modest growth in the fourth quarter of '23 after seven consecutive quarters of negative growth.

The global PC shipments rose 3% year-over-year in the fourth quarter of '23. Even though this looks lower than the double digit percentage growth during 2020-21, it could indicate the start of a refresh cycle for the PCs bought during the COVID-19 pandemic and prior, according to Canalys, the analysts noted.

This also comes at a time when the sector is approaching the end of life of Windows 10 in October 2025 and a rising number of AI-capable PCs are planned to be introduced to the market, according to the analysts.

All these factors offer tailwinds to the future demand in the sector. Thus, the analysts are now more optimistic on the PC demand outlook over 2024-25. For context, Canalys forecasts 8% year-over-year growth in PC shipments in FY'24.

HP is the second largest PC vendor in the world and the analysts think that the growth in HP's personal systems segment will, therefore, track the sector trends. Growth in PC shipments by HP has been consistently higher than the sector average since the first quarter of 2023.

Over the same period, HP's personal system segment revenue growth has led the PC sector revenue growth. For FY24-25, the analysts upgraded their assumptions for HP's personal segment and now expect 5% to 6% year-over-year revenue growth, starting from the second half of FY'24.

In addition, the analysts said that over the last three quarters, HP has reported 1.6-3.3 percentage points expansion in its gross margin and its non-GAAP operating margins have been trending towards the upper end of its long-term guidance for both printing and PC segments. They expect this trend to continue in FY24-25.

HP (HPQ) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors' average rating is more positive with a Buy and so is the average Wall Street analysts' rating, Buy.

HPQ +2.03% to $28.71 premarket Feb. 14