HP Inc. HPQ is experiencing margin pressure as rising memory and storage costs increase component expenses across its Personal Systems business. However, disciplined pricing, cost-reduction initiatives and a shift toward higher-value products could help the company protect profitability despite a challenging operating environment.
In the third quarter of fiscal 2026, HP reported revenues of $15.7 billion, up 12.5% year over year. However, its non-GAAP operating margin declined 60 basis points to 6.5%, while gross margin fell to 18.8% amid higher commodity costs and an increased contribution from Personal Systems. The segment generated $11.8 billion in revenues, up 18%, but its operating margin declined 80 basis points to 4.6%. Although pricing actions and cost reductions partially offset rising expenses, the pressure on profitability remains evident.
HP is pursuing a four-pillar mitigation strategy encompassing supply security, demand shaping, targeted cost reductions and disciplined pricing. The company has qualified new suppliers, adjusted product configurations and implemented repricing initiatives. Product redesign, platform optimization and revisions to long-term pricing contracts are expected to provide additional benefits as these measures take effect. HP also reported improved memory supply availability and higher order fulfillment rates, supporting its ability to meet customer demand.
Portfolio optimization represents another important margin lever. HP is prioritizing premium PCs, AI-enabled computers, workstations and higher-margin services and peripherals. These categories can improve revenue mix and help offset lower unit shipments. Management also expects edge AI workloads and related offerings to create opportunities for profitable growth. Nevertheless, near-term pressures persist. HP expects memory and storage costs to rise further, with Personal Systems margins likely reaching a low point in the fourth quarter of fiscal 2026 before improving into fiscal 2027.
How Competitors Fare Against HPQ
The AI PC business in which HPQ claims to lead the market is facing considerable competition from Dell Technologies DELL and Lenovo LNVGY.
Dell has numerous workstations that offer AI capabilities. These workstations are DELL XPS 13, Inspiron 14 Plus, Inspiron 14, Latitude 7455 and Latitude 5455. Lenovo’s lineup of AI computers includes Lenovo ThinkPad X1 Carbon 10th Gen and later, Lenovo Yoga 9i and Lenovo ThinkBook Plus Gen 3.
HPQ’s Price Performance, Valuation and Estimates
HPQ shares have appreciated 34.7% year to date, outperforming the Zacks Computer - Micro Computers industry and the Zacks Computer and Technology sector’s return of 31.3% and 15.8%, respectively.
HPQ YTD Performance Chart
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Despite the appreciation in the share price, HPQ trades at a discount. From a valuation standpoint, HPQ trades at a forward price-to-sales ratio of 0.45, below the industry’s 8.5. The discounted valuation is further substantiated by the Zacks Value Score of A.
HPQ Forward 12-Month (P/S) Valuation Chart
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for HPQ’s fiscal 2026 revenues suggests year-over-year growth of 3.5%. Estimates have remained unchanged in the past 30 days.
Image Source: Zacks Investment Research
HPQ sports Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
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This article originally published on Zacks Investment Research (zacks.com).