HP's Earnings Miss and Lowered Outlook: Why Near-Term Risks Outweigh Valuation Hopes

HP Inc. (HPQ) has long been a bellwether for the tech sector's health, but its latest earnings report underscores a stark reality: the company is struggling to navigate a perfect storm of tariff pressures, margin erosion, and a weakening tech cycle. With a Zacks Rank #4 (Sell) rating and a host of deteriorating fundamentals, investors should treat HP's recent dip as a short-term sell opportunity—one where the risks are far from fully priced in.

The Earnings Miss: More Than Just Tariffs

HP reported Q2 2025 revenue of $13.2 billion, a 3.3% year-over-year increase but a 1.5% miss against consensus estimates. While Personal Systems revenue held up (aided by AI-driven PC sales), the Print segment—a longstanding cash cow—sank for the fourth consecutive quarter, down 3% in constant currency. This decline, driven by sluggish demand in North America and China, highlights a structural issue: HP's reliance on legacy hardware in an increasingly software-centric world.

The real red flag, however, is margin compression. Operating margins fell to 7.3%, a 1.5-point drop from the prior year, with tariffs alone shaving 100 basis points off profitability. HP now expects tariffs to reduce non-GAAP EPS by $0.12 in 2025, a drag that will persist until supply chains are fully restructured—a process not expected to conclude until Q4.

Guidance Cuts Signal a Wider Problem

HP slashed its FY25 non-GAAP EPS guidance to $3.00–$3.30 from $3.45–$3.75, a stark acknowledgment of macroeconomic headwinds. Even more concerning: the company's free cash flow outlook was downgraded to $2.6–3.0 billion, a 20% reduction from prior targets, due to tariff costs and inventory pressures. This paints a picture of a business caught between rising costs and stagnant demand.

Analysts are taking note. The Zacks Rank #4 (Sell) reflects not just the earnings miss but also a broader industry malaise. HP's Computer - Micro Computers sector now ranks in the bottom 29% of all Zacks industries, a reflection of sector-wide underperformance amid tech spending cuts.

Valuation: A Mirage of Stability?

HP's stock has rebounded 11% over the past month, buoyed by optimism around AI PCs and cost-cutting initiatives. However, this rally overlooks two critical flaws:

1. Tariff Mitigation Timeline: While HP aims to offset tariff costs by Q4, its plan hinges on aggressive supply chain shifts and price hikes—moves that could further dampen demand in a slowing economy.
2. Structural Decline in Print: The Print segment's revenue has now declined for four straight quarters. Even with a 19.5% operating margin, this business is shrinking, and HP has yet to prove that AI PCs or software can replace the cash flow it generates.

The valuation math is grim. HP trades at 11.2x trailing 12-month EPS, a premium to its five-year average of 9.8x. Yet with FY25 EPS now cut by 13%, the multiple expands to 14x—making the stock overvalued unless margins rebound sharply, a scenario made unlikely by ongoing tariffs and weak demand.

The Case for a Near-Term Sell

The risks are mounting:
- Margin Headwinds: Even if HP meets its $2 billion cost-savings target, tariff-driven margin pressure could negate gains.
- Macro Uncertainty: HP's guidance assumes “moderated demand” in H2—optimistic wording for a sector facing rising recession risks.
- Zacks Sell Signal: The #4 rating and downward earnings revisions reflect analyst pessimism, a trend that could accelerate if Q3 results miss again.

Investors are better served to wait for a clearer resolution to tariff issues and a stabilization in Print revenue. Until then, HP's valuation remains vulnerable to further downgrades.

Historically, when HP has missed earnings estimates, buying the next day and holding for 20 trading days has yielded an average return of 4.51%, with no drawdown. However, current conditions—including margin erosion and the structural decline in the Print segment—suggest this historical pattern may not repeat. The recent earnings miss, paired with deteriorating fundamentals, underscores the need for caution.

Final Take: Proceed with Caution

HP's story is a microcosm of the broader tech sector's struggles: legacy businesses under pressure, margin wars intensifying, and macroeconomic uncertainty clouding the horizon. While the stock's dip might tempt bargain hunters, the reality is this: HP's fundamentals are deteriorating faster than its valuation reflects. For now, the risks—tariffs, margin erosion, and a weakening Print business—outweigh any near-term upside.

The Sell rating isn't a temporary blip. It's a warning.

In a market where patience pays, HP is a reminder to avoid companies clinging to outdated models. The time to act? Now.