HP Inc.: Better years ahead (NYSE: HPQ)

justin sullivan

Although HP Inc. (NYSE: HPQ) held the largest hardcopy device market share, its 5-year average revenue growth in the printing segment (2.58%) is lower than that of the personal systems (PC) segment (7. 80%). Thus, we analyzed the growth drivers for each segment to determine the reason for the higher growth in its PC segment, and then projected HP’s revenue.

hp revenue

HP, Khaveen Investments

Drivers on commercial and personal PCs

PC market share

Gartner, Khaveen Investments

As the PC market share chart from our previous analysis of Apple (AAPL) shows, as of Q3 2018, HP held the second-largest market share, while Lenovo (OTCPK:LNVGY) held the largest. market share. HP’s market share decreased slightly from Q3 2017 (13.77%) to Q2 2022 (13%). However, the company’s personal systems segment has recorded an average revenue growth of 7.80% over 5 years. We then analyzed the drivers of segment growth based on business and personal use.

The 11-year average growth of the PC market is -1.93% based on PC shipments. Shipment growth for all companies is above market except for Acer and others (none of the top 6 companies) with average growth of -4.43% and -10.30% respectively.

Commercially, PCs are needed to connect with stakeholders. Rising spending on hybrid work solutions, as the company mentioned, has further boosted demand for business PCs.

Much of this innovation is driven by the rise of the hybrid office. Our devices allow people to connect, create and collaborate across multiple sites and do it securely. – Enrique Lores, President and CEO

globalization index

kof, Khaveen Investments

Therefore, we believe that there is a growing need for PCs to facilitate business connectivity due to globalization. As shown, from 2008 to 2019, the index of globalization in all its aspects has increased, indicating increasing globalization. Therefore, we believe that increasing globalization is important to drive PC growth.

In addition, a personal PC is used for:

multimedia entertainment, playing PC games and accessing the Internet

such as social media and news. We believe that the increase in time spent on online activities can be measured by daily time spent on social media, which increased from 90 minutes per day in 2012 to 147 minutes per day in 2022. We believe that the rise Internet should continue to drive demand. for PCs.

Continued Internet Growth Drives PCs

pc and internet penetration

ITU, Worldometers, Khaveen Investments

Based on the graph, Internet penetration and PC penetration are positively correlated. Internet penetration increased from 22.8% in 2008 to 53.4% ​​in 2019, and we believe this has boosted PC penetration. As noted, PC penetration has increased from 33.20% in 2008 to 47.10% in 2019. We believe that the advancement of Wi-Fi leads to better connectivity that supports higher Internet penetration rates.

wifi sharing

Trendforce, Khaveen investments

As shown in the graph we obtained from our previous analysis of Qualcomm (QCOM), there is a shift from Wi-Fi 4 and earlier versions to Wi-Fi 6, where the share of Wi-Fi 6 devices increased from 0% in 2018 to 28% in 2020, while the share of Wi-Fi 4 and earlier devices decreased from 31% in 2018 to 0% in 2020. Overall, the new version of Wi-Fi technology -Fi replaces the old version, showing the advancement of the Internet.

As mentioned by Statista:

In developing countries, the penetration rate of PCs is lower with about one third of households having a computer. In contrast, the share of households with a personal computer in developed countries was closer to 80%.

Therefore, we believe that emerging markets would be the main driver of PC growth due to the greater room for growth in PC penetration.

We then divide PC penetration by Internet penetration to determine the internet penetration factor on PC penetration over time. As shown below, it went from 1.46x in 2008 to 0.88x in 2019. We believe this indicates that a higher increase in internet penetration would lead to a lower increase in PC penetration at the future, the reason being that many other devices have been made available to connect to the internet such as smartphones, tablets, televisions and smartwatches.

PC market

2023F

2024F

2025F

Users (‘mln’)

5,300

5,701

6,133

% growth (‘a’)

6.0%

7.57%

7.57%

World population

8,031

8,109

8,184

Internet penetration

66.0%

70.3%

74.9%

Growth %

5.0%

6.5%

6.6%

PC Penetration/ Internet Penetration (‘b’)

0.74

0.70

0.67

Growth %

-4.5%

-4.5%

-4.5%

Growth of the PC (“c”) market

4.4%

5.3%

5.1%

* c = axb

Source: ITU, Worldometers, Khaveen Investments

To obtain the projected growth of the PC market, we multiplied the projected growth of Internet users and the PC penetration/Internet penetration ratio. Since the ratio had fallen by an average of 4.5%, we continued to take this fall into account in our projections.

Personal Systems Revenue Projection

average over 11 years

Factor

2022F

2023F

2024F

2025F

Personal Systems ($millions)

37,275

38,947

41,053

43 173

Growth

0.03%

1.02x

-14.03%

4.49%

5.41%

5.17%

Market growth

-1.93%

Source: HP, Khaveen Investments

We then projected revenues for HP’s personal systems segment based on market growth. We first got the HP factor of 1.02x based on HP’s average revenue growth over the past 11 years (0.03%) versus average market growth. The factor represents HP’s competitive advantage or disadvantage relative to its competitors. We then prorated the company’s revenue in 2022 based on its first and second quarter results. Additionally, we projected HP’s 3-year revenue growth from 2023 by multiplying our PC market growth forecast and HP’s personal systems factor of 1.02x. Overall, we expect the company’s personal systems segment to reach $43,173 million in revenue in 2025.

Lower print growth due to shift from print to online media

paper device market share

IDC, Khaveen Investments

To analyze HP’s printing segment, we calculated the market share of hardcopy devices based on each vendor’s shipments. As mentioned by Statista,

The paper peripherals market covers A2 to A4 single function printers, multifunction systems and single function digital copiers.

As the chart shows, HP is the market leader as it has historically been the largest in the hard copy device market with a share of 40.33% in 2021, which is also higher than in 2012 ( 38.97%). However, its market share had decreased compared to 2020 (41.14%). Canon (CAJ) was also still the second with a market share of 20.25% in 2021. It was down slightly from 20.28% in 2012. Additionally, Epson’s market share (OTCPK: SEKEF) and Brother had increased compared to 2012.

HP’s paper device shipments had the third-lowest 11-year average growth (-1.45%), while others saw the lowest growth of -4.30%. In contrast, Brother recorded the highest growth of 1.24%, followed by Epson with an average growth rate of 0.06%. The 11-year average growth of the paper peripherals market is -1.52%. We believe that the negative market growth is due to the shift from print media to online media for reasons such as cost savings and convenience.

us news source

Reuters Institute, Khaveen Investments

As the graph shows, the % of the population that gets their news online in the United States, for example via social media, has remained higher compared to the % that gets their news via print media, like newspapers. Additionally, the % print has steadily decreased from 47% in 2013 to 15% in 2022, while the % online is slightly lower in 2022 (67%) compared to 69% in 2013 Overall, we believe the decline of both forms of media as a source of news is due to fewer people consuming news in 2022 compared to 2013.

Projection of HP hard copy deliveries

average over 11 years

Factor

2022E

2023F

2024F

2025F

Print segment shipments (‘mln’)

38.67

40.51

42.43

44.45

Growth

-1.45%

1.05x

4.76%

4.76%

4.76%

4.76%

Market growth

-1.52%

4.55%

4.55%

4.55%

4.55%

Source: IDC, Research and MarketsKhaveen Investments

To forecast HP’s printing segment shipment growth, we derived the HP factor of 1.05x based on HP’s average shipment growth over the past 11 years (-1.45%) vs. the average 11-year market revenue growth (-1.52%). The factor represents HP’s competitive advantage or disadvantage relative to its competitors. We then obtained HP’s 4-year revenue growth forecast of 4.76% by multiplying the market CAGR (4.55%) and the factor of 1.05x. Overall, we based our revenue growth forecast for the company on our shipment growth projection of 4.76% through 2025.

Risk: smartphones are replacing PCs

We believe that smartphones are progressing to be able to provide more PC-like functions, and smartphones are also able to connect to the Internet. Moreover, smartphones are also more portable than PCs. Therefore, we believe that smartphones can replace PCs, which may affect the growth of HP’s PC segment.

Verdict

HP Revenue Breakdown ($millions)

2022F

2023F

2024F

2025F

Personal systems

37,275

38,947

41,053

43 173

Growth

-14.03%

4.49%

5.41%

5.17%

Impression

21,085

22,088

23,138

24,238

Growth

4.76%

4.76%

4.76%

4.76%

Total

58,360

61,035

64 191

67,412

Growth

-8.08%

4.58%

5.17%

5.02%

Source: HP, Khaveen Investments

We projected revenue growth based on each segment, as mentioned in the previous points. Going forward, we expect the company’s total revenue to reach $67,412 million by 2025. To conclude, we analyzed HP due to the higher growth of its PC segment compared to the segment of the print. We believe that the higher growth in the PC segment is due to the growth of the Internet, while the lower growth in the print segment is due to the shift from print media to online media. Additionally, we expect HP to have a 4-year total average revenue growth of 1.67%. Based on analyst consensus, HP has an analyst consensus average price target of $30.69resulting in a 13.9% increase, and therefore we rate the company as a To buy.

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