Buy HP Inc. Stock For 25% Upside?

Up more than 2x from its low in March 2020, at the current price of $28 per share, we believe HP Inc. stock (NYSE: HPQ) has further upside potential. HP Inc. has seen its stock rise from $14 to $28 off its March 2020 low, more than the S&P which increased by over 85% from its lows. Further, the stock is up around 25% from the level it was at before the pandemic. However, we believe that HPQ stock could rise around 25% to regain its recent high of $36, driven by expectations of steady demand growth and strong Q2 2021 results. Our dashboard What Factors Drove 39% Change In HP Inc. Stock Between 2018 And Now? has the underlying numbers behind our thinking.

HP Inc. stock’s rise since late 2018 came despite a 3% drop in revenues from $58.5 billion in FY 2018 to $56.6 billion in FY 2020 (HPQ’s fiscal year ends in October). Net margins dropped from 9.1% to 5% over this period, but this was largely due to a $387 million tax expense in FY’20, compared to a $2.13 billion tax benefit in FY ’18. Combined with a 12% drop in the outstanding share count, EPS (earnings-per-share) dropped 39%, from $3.30 to $2.01 over this period.

However, HPQ’s P/E (price-to-earnings) multiple rose from 6x in 2018 to 12x by 2020 end, and has further risen to 14x currently. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of Coronavirus initially saw a drop in demand for computing devices and peripherals across all markets, which meant lower demand for HP’s products. However, with work from home becoming the new normal, demand for these products has risen since. This has benefited HPQ, as is evident from the company’s revenues in Q2 2021, which came in at $15.9 billion, up from $12.5 billion for the same period last year. Operating income rose from $826 million to $1.36 billion over this period, and with a roughly unchanged effective tax rate, EPS jumped from $0.53 to $1.00.

Additionally, with laptops and computer peripherals sales expected to stay strong, we believe demand for the company’s products will continue growing, and that revenues stand to benefit in the medium term. Further, if the company can continue controlling expenses going forward, a rise in investor expectations could drive up the company’s P/E multiple. We believe that HP Inc. stock can rise around 25% from current levels, to regain its recent highs of $36.

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