HPQ Stock Price Prediction: Why HP, Inc’s Stock Could Reach $28

motek 1This HPQ stock price prediction article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

  • I predicted last November 17 that Xerox will increase its bid for HP, Inc. Xerox indeed raised its takeover offer from $22 to $24 last earlier this month.
  • The February 20-dated shareholder rights plan from HP is a poison pill that will compel Xerox to increase its $24/share bid.
  • The excellent Q1 FY 2020 report of HPQ will likely prod management to demand a higher offer from Xerox.
  • The aggressive $15 billion share buyback plan will boost HPQ’s price near or beyond $28.
  • HP’s growing PC business has multiple tailwinds from Windows 7’s EOL, 5G connectivity, and foldable laptops.

The stock of HP Inc. (HPQ) is now priced 16% higher than my previous November buy recommendation. Xerox also upped its bid offer for HPQ to $24/share earlier this month. The limited shareholder rights plan by HP’s management will most likely encourage Xerox to again raise its bid. It’s worth the risk adding more HPQ while the stock still trades below $25. The shareholder rights plan is a poison pill/recalcitrant tactic won’t  immediately deter Xerox/Carl Icahn from pursing HP, Inc.

HPQ stock price prediction
(Source: Seeking Alpha)

I won’t be surprised if Xerox goes up to $28/share.  HPQ’s excellent Q1 2020 earnings report showed a growing PC business. Couple this up with HPQ’s strong balance sheet and Xerox will only become more daring/persistent.  I don’t believe Icahn (and key Xerox people) will also get discouraged by HPQ’s revelation that it will return $16 billion to its shareholders during fiscal years 2020 to 2022.

HPQ’s latest quarterly normalized net income is only $730.6 million.  I do not think HPQ will really spend most of its FY 2020 to $2023’s net income on stock repurchases and increased dividend payments. My own takeaway is that HPQ’s plan to spend $15 billion on stock buyback should instead go toward buying Xerox. Xerox’s current market cap is less than $7.8 billion.

Aggressive 12-month Share Buyback Plan

HPQ management’s initial plan is to spend $8 billion in the next 12 months on stock repurchases. HPQ has more than $4.2 billion in cash & equivalents, and a quarterly cash flow of more than $1 billion. HP, Inc. Can certainly afford to spend $8 billion on share repurchases within this year. 

More than 83% of floated HPQ shares are owned by institutional investors/mutual funds. The bold promise to spend $8 billion within the next 12 months should convince institutional investors not to sell their HPQ holdings to Carl Icahn or other Xerox-related buyers.

(Source: Yahoo Finance)

We should add more HPQ now because management might actually implement this $8 billion share buyback plan before 2020 ends. It’s a defensive move against Xerox’s hostile takeover bid. Aggressive share buybacks create instant price momentum. It will boost HPQ’s price near or beyond $28. If HP’s management is intent on preventing Carl Icahn from accumulating more HPQ shares, it will do consistent big-budget share buybacks for the next 12 months.

PC Business Is Growing

HPQ has a near-term tailwind from the looming threat of the COVID-19 coronavirus epidemic probably becoming a global pandemic. There are less people doing foreign travels and dine-outs. Consequently, more people on the planet today have greater disposable cash. The savings they made from not buying planet tickets, booking hotels, and eating out could instead be spent on high-end laptops/computers and new printers.

The 2% year-over-year growth in the PC (or Personal Systems segment) business helped offset the -7% year-over-year decline in Printing segment’s first quarter revenue. The coronavirus outbreak might help deliver another year-over-year growth for HPQ’s Q2 Personal Systems revenue.

(Source: HP, Inc. Investor Relations)

The Printing business still generates more profit than Personal Systems. Going forward, greater demand for new computers will eventually help HPQ’s PC business deliver more than $700 million in quarterly operating profit. The contagious anxiety over COVID-19 outbreak will likely prod some PC vendors to raise their retail prices.

The fear now is that there will be a short-supply of PC hardware components this H1 2020. It is therefore justifiable if HP raises the price tags of its latest laptops, desktop PCs, and workstation PCs. Further, Microsoft’s EOL (End of Life) for Windows 7 last January meant more companies and individuals are now tempted to buy new computers so they can Windows 10 decently.

HPQ has a future tailwind from the upcoming launch of 5G-compatible laptops. Whether x86-based or powered with ARM-based processors, 5G computers. Mobile productivity is still better achieved using a traditional laptop than on a smartphone. A laptop only needs a fast 5G internet connection to truly become a better ‘work anywhere, work anytime’ tool.

The upcoming launch of foldable or dual-screen laptops is also a tailwind for HPQ. Microsoft is working hard on its Windows 10X operating system for dual-screen/foldable computers. This year, I expect HP, Inc to release a dual-screen or foldable laptop. Lenovo (LNVGY) has already unveiled its ThinkPad X1 5G foldable laptop last month. Foldable and 5G-friendly computers might help HP, Inc come up with higher-margins. Buyers will not be dismayed paying 5% or 10% higher for a 5G laptop that can be folded inside a vest’s pocket.

HPQ’s current low valuation ratios is partly because its PC business still has below 8% operating margin. HPQ could go higher than $28 if it starts coming up with best-selling high-margin computers. Coming up with foldable 5G laptops that can play 3D games and run Photoshop might increase HP’s margins on PCs.

HPQ stock price prediction
(Source: HP, Inc)

Other major PC vendors also have cheap valuation ratios. However, HPQ deserves more decent valuation ratios because it is not a pure-play PC vendor. Unlike Lenovo (LNGY) and Dell (DELL), HP has a robust consumer/commercial printing hardware & supplies business.

HPQ stock price prediction
(Source: Seeking Alpha)

Conclusion

As far as I know HP, Inc sources out most its processors from Intel (INTC), and RAM from Micron (MU). Intel and Micron operate their fabs or semiconductor factories outside of China. HP’s PC business is therefore not exposed to any short-supply problem caused by coronavirus outbreak. Many HP-branded laptops and desktop computers are also assembled in Taiwan, Malaysia, and in the Philippines. 

I expect HP’s PC business to remain growing this year. I expect the printing business to eventually reverse its decline once more home and corporate users start using less third-party inks. HP can lower the price tags of its inks and laser copier/printer toner cartridges. It will hurt margins but it will reverse the declining revenue of the Printing segment.

My long-term buy recommendation for HPQ is congruent with its bullish one-year algorithmic trend score. I Know First gave HP, Inc’s stock a 1-year trend score of 104.66. I Know First has a high predictability score of 0.79 on HPQ. It has an excellent history of correctly predicting the one-year trend pattern of HP, Inc’s stock.

HPQ stock price prediction

Past Success With HPQ Stock Price Prediction

I Know First has been bullish on HP Inc. stock in the past. On November 17, 2019, the I Know First algorithm issued a bullish prediction for HPQ stock price. The algorithm successfully forecasted the movement of the HPQ stock price for the 3 months time horizon. HPQ’s shares rose by 10.85% in line with the I Know First algorithm’s forecast. See chart below.

HPQ Stock Price Prediction

This bullish HPQ stock price prediction was sent to the current I Know First subscribers on November 17, 2019.

Here at I Know First, our algorithm has modeled and predicted assets price movement worldwide for short-term and long-term time horizons, ranging from 3 days to a year, to be used for algorithmic trading. Since 2011, we have been providing daily stock predictions for 10,500 assets, including S&P 500 stocksforex forecastgold price forecast, world indices, and for individual stocks, such as Apple stock forecast, and predictions for popular indices. Additionally, we provide the latest Apple stock news. Our stock forecasts generated by our quant trading tool is used by institutional clients, as well as private investors and traders to identify the top stocks to buy in the market and exercise the traded faster than the other market players.

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