HP Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A global technology company providing personal computing and printing products, services, and related solutions to both businesses and consumers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: HP Inc. operates in two segments: Personal Systems and Printing. The Personal Systems segment offers notebooks, desktops, workstations, and related services, while the Printing segment focuses on printers, supplies, and related services. This separation is important because each segment caters to different customer needs and has different margin structures.

Revenue Distribution:

  • Personal Systems: This segment is the larger of the two. While its revenue is higher, its margins are typically thinner compared to Printing.
  • Printing: This segment is characterized by higher margins, driven by the sale of high-margin supplies such as ink and toner, which provide a recurring revenue stream.

Industry Trends:

  • The personal computer market, as a whole, is saturated and is experiencing a slow decline due to the prevalence of mobile devices and long upgrade cycles. Demand is also affected by macro economic conditions.
  • The printing market, while still profitable for the few players, is contracting as digitalization reduces the need for physical prints.

Competitive Landscape:

  • Personal Systems: HP faces stiff competition from a wide array of vendors: Lenovo, Dell, Apple, and smaller manufacturers. In this industry, market share, price competitiveness, and brand reputation are key battlegrounds.
  • Printing: This market is an oligopoly, with the major players being HP, Canon, and Epson. The key differentiating factor is usually the cost of supplies.
  • Companies also compete by offering value added services and support for their product ecosystem.

What Makes HP Different?

  • Established Brand: HP has a long-standing brand known for reliability, which is a strength in the PC market, where reliability and trustworthiness are vital.
  • Broad Product Portfolio: HP has a broad portfolio of hardware, software and services. It has a big product line in both Personal systems and Printing, covering a wide customer base.
  • Large Distribution Network and Services: They provide an extensive support system for their products.
  • Subscription business: The pivot to subscription services in printing is an attempt to sustain long-term revenue growth.

Financial Analysis:

HP’s financial performance is mixed. It has a good cash flow generation and healthy net margin. The gross margins are decent but there is pressure in operating margins.

  • Revenue: Revenue has been trending lower over the last few years in both segments, as the market for PC is declining, and printing is also shrinking.
  • Profitability: Profit margins are mixed, but printing remains the key component for profitability. The higher cost of components and high inflation rates can have a negative impact on gross margins. The operating margins may also fluctuate because of increasing expenses and competition.
  • Liquidity and Solvency: The company has a good balance sheet. A major part of their capital is funded through cash flow from operations. The company has good cash and short term investments, but with significant long term debt.
    • The company has been taking strategic actions to bring down its cost structure and become more efficient with its operations.

Moat Rating: 2/5

Based on a combination of factors:

  • Weak Brand Moat: HP’s brand gives it an edge in both segments, but this is easily eroded, as other competitors like Apple and Dell also have similarly strong brands.
  • Low Switching Cost Moat: The switching costs for PC’s and printers are low, because consumers can easily switch to other brands. This makes it harder for HP to retain customers long term.
  • Network Effect Moat (Limited): HP has very limited network effects.
  • Intangible Assets: HP does have a lot of patents. But the durability of these patents is questionable, since most of them are related to incremental improvements instead of transformative patents.

The company’s lack of strong defensible competitive advantages makes its moat relatively narrow and not very durable. While they are an established player, it’s unlikely that they will be able to create superior profits than its competitors for long term. Therefore, a narrow moat rating is suitable for HP.

Risks to the Moat and Business Resilience:

  • Technological Disruption: HP faces the risk of technological disruption. For instance, advances in other forms of media could make physical printing obsolete; while new trends and innovations like AI in computing, may dislodge established players like HP.
  • Competitive Pressures: The company is exposed to competitive pressures which could lower its margins.
  • Economic Downturn: The PC market is heavily impacted by economic downturn. Any decrease in consumer spending will decrease HP’s revenues.
  • Supply Chain Issues: HP is vulnerable to changes in the supply chain. Shortage of components, or increases in the price of components, will directly affect its production costs.
  • Changing Consumer Preferences: There is a risk that changes in consumer preferences, especially in younger generations, could make their products irrelevant.

Business Resilience: Despite these risks, HP has some strong points. Its diversified portfolio, extensive distribution network, and long term brand, all helps provide stability to the business. Their strong position in printing as well as a vast number of enterprise clients also give the business some resilience. This allows them to bounce back from external events. Still, their current profitability and returns are still quite modest.

Understandability Rating: 3 / 5

The business is somewhat complicated due to the different segments and their various business models.

  • The PC business is generally quite straightforward, as you just manufacture and sell the product.
  • The printing business is more complex, owing to the supply side model.
  • The overall business model becomes less transparent due to numerous acquisitions, which makes tracking the results of the different businesses confusing.

Balance Sheet Health: 4 / 5 HP has a good balance sheet, and a well-established business model. But there are some points that prevent it from having a perfect balance sheet rating.

  • Strong free cash flow generation.
  • Good level of cash.
  • Still has a fairly high amount of long term debt.

Recent Concerns and Management’s Outlook

  • The company faces the issues of declining demand and sales in the PC market.
  • Inflation is impacting the cost of components and margins.
    • Management is focusing on streamlining operations and product strategy, emphasizing subscriptions and new product lines to maintain their profitability and returns.

In conclusion, HP is an established player with a fairly recognized brand, but the business is facing numerous headwinds in terms of declining market, competition, and higher inflation. Their lack of strong moats, and mixed financial results are concerning. Their valuation and long term prospects are mixed and are dependent on a continued turnaround and better economic environment.