Markets were surprised when Berkshire Hathaway (BRK.B) disclosed a stake in HP Inc. (HPQ) in April 2022, as Warren Buffett typically shies away from tech companies. While Apple (AAPL) is the largest holding for the conglomerate, the “Oracle of Omaha” sees it as a consumer company rather than a tech company.
At its peak, Berkshire was the biggest shareholder of HP, holding an over 11% stake. However, the conglomerate started selling its shares last year, and completely exited the company in Q1 2024.
To be sure, Buffett has been on a selling spree, and now has been a net seller of stocks for six straight quarters. If anything, the selling activity gained traction in Q1, when Berkshire net sold $17.3 billion worth of shares - including paring stakes in top holdings like Apple and Chevron (CVX).
While Buffett might have his reasons to exit HPQ, investors might still be better off holding onto this high dividend yield stock, as we'll discuss in this article.
HPQ Stock Soared After Its Fiscal Q2 Earnings
HP released its fiscal second quarter 2024 earnings late last month, and beat on both the top line as well as the bottom line. The stock almost hit its all-time high after the earnings release, but subsequently trimmed some gains. It's nonetheless up over 18% for the year, and is outperforming the S&P 500 Index ($SPX).
Is HP a Play on AI?
According to data compiled by FactSet, almost 200 S&P 500 companies cited the term “AI” during their Q1 earnings calls – which was a new record.
The term AI was featured nearly 50 times during HP’s fiscal Q2 earnings call last month. Importantly, the term “AI PC” accounted for half of those instances - and that’s precisely the investment theme for HP.
During the earnings call, HP CEO Enrique Lores talked about the company’s AI PC portfolio in detail, and said that it has “launched the industry's largest portfolio of AI PCs.” He added, “In the second half, we expect to see the introduction of AI PCs accelerate demand over and above the anticipated PC refresh cycle and Windows 11 rollout."
HP is hardly a name that investors might think of first when investing in AI stocks. However, it looks like an AI play in its own right, as the sales of AI PCs gain traction in the coming quarters. While global PC shipments fell YoY in both 2022 and 2023, IDC expects volumes to rise 2% this year, and then increase at a CAGR of 2.8% between 2024 and 2028.
According to IDC, gamers and creators will also need to look at AI PCs. While IDC does not expect AI capabilities to lead to a higher PC installed base, it does foresee a bump in average selling prices.
HP expects AI PCs to account for around 10% of its shipments in the second half of the year, and expects that metric to rise significantly over the next two years. Lores is optimistic that AI PCs will help it improve the average selling prices by 5% to 10%.
David Einhorn Took a Stake in Q1
Meanwhile, even as Buffett exited HP in Q1, hedge fund manager David Einhorn took a stake in the company, and is optimistic about the AI opportunity for the PC maker.
After HP’s fiscal Q2 earnings, several brokerages raised their HP target prices. Wells Fargo raised its target price from $25 to $30, while TD Cowen hiked from $30 to $32, even as both firms maintained their “Hold” ratings on the stock.
Citi maintained its “Buy" rating and raised the target price by $2 to $37, while JPMorgan analyst Samik Chatterjee raised his target price from $34 to $38.
HPQ Stock Forecast
HP has a consolidated rating of “Moderate Buy” from the 13 analysts covering the stock. Five analysts rate it as a “Strong Buy,” and 1 as a “Moderate Buy.” Six more analysts rate it as a “Hold,” while the remaining 1 has rated it as a “Sell.”
While HP trades ahead of its mean target price of $34, the Street-high target price of $40 is 10.6% higher than yesterday’s closing prices.
To be sure, HP faces several headwinds - especially in its Print business, which happens to generate much higher margins than the PC business, but is witnessing a fall in revenues. However, I believe the risk-reward still looks favorable for HP, if not to the extent it did before last month’s rally.
HP trades at a next 12-month (NTM) price-to-earnings (PE) multiple of just under 10x, which does not look too exorbitant, considering its adjusted earnings per share (EPS) is expected to rise 5.1% in the current fiscal year and 7.7% in the next.
Should You Follow Buffett and Sell HP Stock?
The company expects to post free cash flows between $3.1 billion-$3.6 billion in the current fiscal year, which implies a free cash flow yield of nearly 10% at the midpoint. HP has a goal of returning all of its free cash flows to shareholders through a mix of share repurchases and dividends.
The company’s current dividend yield is around 3.1%. While that's below the nearly 4% the stock was yielding earlier this year, it's nonetheless over twice what the average S&P 500 Index constituent pays.
Overall, I believe that while HP has seen some rerating following the earnings last month, the recent fall from the peaks is an opportunity to buy the dip in the stock.
On the date of publication, Mohit Oberoi had a position in: AAPL , BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
