A respected Wall Street analyst has downgraded HP Inc's share rating on the back of worries that its PC division won't be able to sustain the growth numbers it has been banking, which paper over the cracks in the print supplies business.
The company is currently trying to dig itself out a hole of its own making: it mis-forecast toner cartridge revenues in EMEA for FY'19 that started in October last year, not factoring in the burgeoning demand for cloned or remanufactured alternatives or - seemingly - that businesses are printing less than they used to.
This was a costly mistake and one that sources claimed led to the abrupt recent exit of EMEA boss Nick Lazaridis.
Now Bernstein analyst Toni Sacconaghi downgraded the company's share rating from outperform to market perform, meaning the HP is expected to be in line with competitors, rather than outdoing them.
"We worry that printing may be facing greater structural headwinds from the shift to digital (i.e people printing less) and increased pressure from cloned/ remanufactured supply," the financial analyst stated. "In short, there is a higher likelihood the printing business is a 'melting ice-cube' - despite myriad efforts by HP to improve the business," he stated in a report seen by The Register.
HP, like Dell and Lenovo, has caught the wave of customers that are escaping Windows 7 as Microsoft prepares to pulls down the shutters on extended support for the OS in January. This upgrade cycle though has a shelf life and this, along with US-China trade tensions, is what worries the analyst.
Year to date, HP has made up for its earnings shortfall in printing with cyclical strength in PCs. However, we worry about the sustainability of recent PC strength - management has acknowledged that margins are unsustainably high due to recent component cost declines, and the company appears to be benefiting from a corporate upgrade cycle that it will lap in FY20, at which point US laptop sales may also be subject to 10 per cent tariffs.
And herein lies the rub: PCs generate roughly two-thirds of HP Inc's revenues, but historically they only accounted for one-third of the company’s operating profit. Another key figure is that annual printing revenue has declined from $26bn in 2011 (PDF) to $20.8bn in 2018 (PDF).
"Thus, the long-term trajectory of printing supplies growth is crucial to determining HP's terminal value," the report stated.
Bernstein added the "credibility" of senior management had been "seriously undermined by having guided down supplies twice in a year", and felt the new CEO Enrique Lores – who replaced Dion Weisler recently and was formerly president of HP's imaging, printing and solutions group – is "unproven".
Weisler worked at the company for six years and led the business as it undocked from the HP mothership. During his time, the company gave Lenovo more than a run for its money in the PC market and bet big on the A3 copier market by buying Samsung's division, as well as buying print service house Apogee. He quit the company over a family health matter.
According to Gartner's shipment figures, HP was in second spot behind Lenovo in the global PC market in Q2 – along with Dell, the three companies accounted for more than 64 per cent of total sales.
The Register has asked HP Inc to comment. ®