Xerox Holdings Stock: Steady Demand Slump Could See Stock Shed 15%

Xerox Holdings stock (NYSE: XRX) is up around 5% so far this year, but at the current price near $24 per share, we believe that Xerox stock has around 15% potential downside.

Why is that? Our belief stems from the fact that Xerox stock is up almost 1.5x from its low in March 2020, and after posting mixed Q1 ’21 numbers, it’s clear that demand for the company’s products hasn’t yet recovered. Our dashboard What Factors Drove 20% Change In Xerox Holdings Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Xerox stock’s rise since late-2018 came despite an almost 30% drop in revenues from $9.66 billion in FY2018 to $6.87 billion in FY2020. However, a 12% drop in the outstanding share count meant that RPS dropped around 17% from $37.50 to $31.10 over this period.

Meanwhile, the company’s P/S (price-to-sales) ratio rose from 0.4x to 0.6x between 2018 and 2020, and currently trades slightly higher at 0.7x. However, given Xerox’s mixed Q1 2021 results, there is further possible downside risk for Xerox’s multiple.

So what’s the likely trigger and timing to this downside?

Demand for printing products and services has seen a steady decline over the past few years, and the pandemic aggravated this trend even further. This is evident from Xerox’s full-year earnings for 2020, where revenues dropped sharply to $7 billion, from $9 billion in 2019. Further, the company posted mixed revenues for Q1 2021 (ending March 2021), where revenues came in at $1.71 billion, down from $1.86 billion in Q1 2020. However, the company did a better job controlling expenses, with pre-tax income coming in higher at $53 million, compared to a loss of $5 million. This saw EPS rise to $0.18 from -$0.03 over this period.

We expect revenue growth to stay weak in the medium term, and despite lockdowns being lifted, we believe document printing devices will continue seeing a drop in demand. We believe this will further weigh down the company’s revenues, and this could drive down the company’s P/S multiple further, and we believe that Xerox stock can drop 15% from current levels, to around $20.

 

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