HP Stock Outperformed Dell Amid AI-Fueled PC Recovery. Is It The Better Bet?

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HP Inc. stock (NYSE: HPQ) has gained about 8% over the last week (five trading days) outperforming its peer Dell Technologies stock (NYSE:DELL), which has declined about 18% over the same period. However, looking over a longer period, HP stock has gained about 17% year-to-date, compared to Dell stock which remains up by over 80% over the same period.

Looking at a slightly longer period, HPQ stock has shown gains of 40% from levels of $25 in early January 2021 to around $35 now. DELL stock has seen solid gains of 80% from levels of $75 in early January 2021 to around $135 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in both DELL and HPQ has been far from consistent with both stocks underperforming the S&P 500 over two out of the last three years. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

While both companies compete in the information technology and computer hardware space, there are a couple of reasons for the divergence in their recent performance.

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HP reported a better-than-expected set of Q2 FY’24 results driven by signs of a recovery in the PC business. Enterprises and consumers want to upgrade their personal computers to deploy more artificial intelligence applications. Key semiconductor vendors including  Intel, Advanced Micro Devices, and Qualcomm have unveiled AI-capable chipsets in recent months. This could drive up PC sales volumes for the likes of HP. Moreover, average selling prices for PCs could also increase.  Over the last quarter, revenue for HP’s personal systems business, which includes its PC operations, grew by 3% year-over-year in Q2, compared to a -4% decline in Q1. Margins for the PC business are also looking up, with operating margins coming in at 6%, up 60 basis points compared to the last year, driven by lower component and logistics-related costs.

Dell’s April Q1 FY’25 results were also better than expected. The company upped its full-year revenue outlook to between $93.5 billion and $97.5 billion, from a previous range of $91 billion to $95 billion in revenue, representing a growth of close to 9% compared to last year at the upper end. However, investors are concerned about the company’s AI server business. Dell reports its AI server sales in the infrastructure services segment, which includes the sales of servers, storage, and networking equipment. Although the infrastructure segment is projected to grow by over 20% this year, driven by higher demand for AI processing, the AI business doesn’t yet appear to be accretive to Dell’s profitability. While AI server sales added $1.7 billion to the company’s infrastructure business sales over Q1, compared to last year, operating profits were essentially flat, indicating that margins for the business may not be very high. Dell’s gross margins also declined by about 4% from the year-ago period. This has troubled investors, who were likely counting on AI business to drive earnings growth for Dell.

However, despite the recent setback for Dell, it might be the better long-term pick compared to HPQ. From a valuation standpoint, HPQ is certainly cheaper. The stock trades at just about 10x projected 2024 earnings, although its revenue growth is expected to remain roughly flat this year. The low multiple is due to concerns about its printing business. HP is seeing a secular decline in its high-margin printing business.  The business has been HP’s cash cow for years, accounting for about two-thirds of its company’s operating income. However, the business has been on the decline with sales falling by 8% year-over-year to $4.4 billion in the most recent quarter.  This could prove a long-term threat to the company’s valuation. On the other hand, Dell Technologies stock trades at 17.5x forward earnings. However, growth is likely to be stronger, projected at high single-digit levels over the next two years, led by PC and server sales.

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 HPQ Return -3% 17% 138%
 S&P 500 Return 0% 11% 136%
 Trefis Reinforced Value Portfolio -1% 4% 635%

[1] Returns as of 6/5/2024
[2] Cumulative total returns since the end of 2016

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