Despite having declined over 20% since the beginning of this year, at the current price of $16 per share, we believe HP Inc. (NYSE: HPQ) could see further downside.
Why is that? The key is HPQ’s stock is down nearly the same amount since the start of this year, as it has been since the start of 2019, a little over a year ago. This implies that the drop in HPQ’s stock has been solely due to the Covid-19 crisis, and given the nature of the company’s business, it seems the worst is still not over.
Our dashboard Why Hewlett-Packard Stock moved -18.5% provides the key numbers behind our thinking, and we explain more below.
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This drop in HPQ’s stock has largely been due to the 41% slump seen in HPQ’s PE multiple from around 13x at the end of 2018 to 10x at the end of 2019. HPQ’s PE multiple is further down to below 8x, given the volatility of the current situation, and the stock is down to levels last seen at the start of 2017.
This drop comes despite a 13% growth in HPQ’s revenues, a 25% growth in net income, which, combined with a 10% drop in outstanding share count, has led to a ~40% jump in EPS.
Despite this, we believe that there is still significant additional possible downside for HPQ’s stock price as the PE multiple could drop to levels of around 5x, last seen in 2015.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant there could be a significant drop in fresh laptop and PC sales, as companies and individuals cut back on expenses linked to non-essentials. This could also impact printer and cartridge sales, as given the current work-from-home situation, online sharing of documents is a much better option than physical printing. We believe HPQ’s Q1 results in May will confirm the hit to its revenue. It is also likely to accompany a lower Q2 as well as 2020 guidance.
If there isn’t a clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock could see its P/E decline from the current level of 8x to 5x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $10.
Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture, and complements our analyses of Coronavirus impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.