HP Inc. Stock Upgraded to Buy as PC Market Strengthens

BofA Securities analyst Wamsi Mohan has given a double upgrade to shares of HP (ticker: HPQ), raising them to a Buy from Underperform rating. He has also increased the price target to $33 from $25, indicating a potential 29% increase in the stock's value.

Positive Outlook on PC Market Recovery

Mohan's upgrade is primarily driven by his belief in the recovery of the personal computer market, which is expected to drive growth for HP. While PC demand initially surged during the pandemic as people worldwide adapted to remote work and online learning, it hit a plateau afterward. However, recent reports from market research firm IDC suggest that PC shipments are estimated to grow by 3.7% year over year in 2024, even with high inflation factors affecting consumers.

During an investor call after the third-quarter earnings report in August, HP Chief Executive Enrique Lores expressed optimism about the company's PC business, stating that it had seen growth from Q2 to Q3 and is expected to continue growing in Q4.

Factors Supporting the Buy Rating

In addition to his positive outlook on the PC market, Mohan cites two key factors supporting his Buy rating on HP. Firstly, he believes that the company's free cash flow will hit its lowest point in fiscal 2023 before rebounding. This expectation aligns with analysts surveyed by FactSet, who project a decline in HP's fiscal 2023 free cash flow to $3.1 billion from the previous year's $3.9 billion, followed by an anticipated increase to $3.3 billion in 2024.

Secondly, Mohan highlights lower restructuring costs as a driver for higher free cash flow, further justifying the Buy rating.

Challenging Times for HP

Although Mohan's upgrade suggests positive prospects for HP, it comes at a challenging time for the company. In August, HP reduced its fiscal 2023 adjusted earnings guidance to a range of $3.23 to $3.35 per share, down from the previous range of $3.30 to $3.50 per share. Lores attributed this adjustment to the ongoing aggressive pricing environment in the PC market, sluggish demand in China, and softening enterprise demand.

Despite these challenges, HP's stock has remained resilient, declining only 2.6% this year.