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The Ratings Game: HP faces ‘pockets of demand challenges,’ analyst warns in downgrade

HP Inc. could see a more challenging stretch ahead as the maker of personal computers faces issues on both the supply and demand fronts, according to a Wall Street analyst.

Citi Research analyst Jim Suva downgraded HP’s stock

to neutral from buy Monday, warning of “pockets of demand challenges in consumer/Chromebooks.”

Suva noted that HP shares have held up better than the broader tech universe so far this year, dropping 10% over the course of 2022, as of the publication of his note, compared with a 30% fall for the Nasdaq Composite Index

in the same span.

“We continue to see HP as a strong operational executor and cash flow generator,” he wrote. “That being said, challenging PC shipment growth and higher freight costs are likely to limit operating income growth and EPS upside here in FY22 as [the] Personal Systems segment was a key driver of operating income growth in FY22E.”

Suva pointed to “pressures in China to replace foreign purchases of PCs with domestic alternatives,” which he said could serve as an “overhang” on the stock, since China accounts for about 8% of HP’s unit sales.

He further noted that HP’s print segment could see continued impacts from supply shortages, and he warned that the company may slow its pace of buybacks next year once the acquisition of Poly closes.

“While valuation levels are not stretched at current levels, we believe upside remains limited given moderation in PC demand and continued supply challenges in Print,” Suva wrote. “We do not believe a sell rating is warranted given HPQ’s ~3% dividend yield, and strong FCF [free-cash-flow] yield.”

Suva also lowered his revenue and earnings estimates for Dell Technologies Inc.
but he kept a buy rating on the stock, noting that the company’s commercial business and low Chromebook exposure could help offset pressure elsewhere.

“Additionally we believe core enterprise infrastructure orders for compute/storage (based on Cisco’s, Arista, ODM comments) remain strong and Dell’s position is stronger relative to their OEM [original equipment manufacturer] peers,” he wrote.

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