HPQ Stock Drops After Weak Q2 Outlook, Analysts Eye Second Half Recovery

HP Inc. (NYSE: HPQ) stock fell about 5% premarket on Friday after its fiscal first quarter 2025 results and a lower than expected second quarter EPS outlook, which saw mixed reactions from analysts. Evercore maintained its Outperform rating and $40 price target, while Morgan Stanley took a more cautious stance, lowering its price target to $35 from $36 while maintaining an Equal-weight rating.

HP's weaker-than-expected Q2 EPS outlook was primarily driven by increased tariffs and supply chain diversification costs, as well as margin pressures and the need for a significant PC volume recovery. The company attributed the lower guidance to increased tariffs and the costs associated with diversifying its supply chain away from China. According to FactSet, HP anticipates adjusted earnings per share (EPS) for Q2 to range between $0.75 and $0.85, falling short of the anticipated $0.86 per share.

HP's print margins improved to 19.6% in the fourth quarter, exceeding internal and external forecasts. However, the company anticipates print operating margins will remain at the higher end of the 16% - 19% range in fiscal 2025. Meanwhile, PS margins are expected to climb to the upper half of 5% - 7%, aided by improved pricing strategies and volume leverage. Despite these improvements, margin pressures persist, and HP needs a significant recovery in PC volumes to meet its annual targets.

HP's strategy to reduce U.S. revenue exposure to China by the end of fiscal 2025 is aimed at mitigating the impact of tariffs and geopolitical risks on its supply chain and future growth. By diversifying its supply chain away from China, HP can better navigate potential tariff escalations and ensure smoother operations. This strategy is expected to position HP to better manage costs and adapt to a shifting global trade environment.

Analysts see strong PC demand and cost cuts as potential tailwinds, but with market uncertainties still looming, HP's ambitious second-half profitability forecast is under scrutiny. Evercore highlighted HP's growth in the Personal Systems (PS) segment, with commercial PC sales jumping 10% driven by Windows 11 refreshes and AI PC adoption. However, Morgan Stanley took a more cautious stance, noting that HP's Q2 EPS guidance came in $0.05 below expectations and that first-half EPS will only account for 43% of the annual total—a 10-year low—suggesting HP is betting on a steep profitability ramp in the back half of the year.




In conclusion, HP's weaker-than-expected Q2 EPS outlook and mixed analyst reactions underscore the challenges the company faces in navigating increased tariffs, margin pressures, and market uncertainties. While HP's strategy to reduce U.S. revenue exposure to China and its growth in the Personal Systems segment offer reasons for optimism, the company must still prove its ability to execute on its ambitious second-half profitability forecast. Investors will closely monitor HP's progress in the coming quarters to assess the company's long-term prospects.