Why HP (HPQ) is a High-Risk 'Cheap' Stock for Long-Term Investors

For long-term investors, the allure of a low price-to-earnings (P/E) ratio often signals value. HP Inc. (HPQ), trading at a P/E of 9.77 as of August 2025, appears undervalued compared to its 10-year average of 9.44 and peers like Microsoft (MSFT) and Apple (AAPL), which sport P/E ratios of 38.63 and 34.74, respectively. However, a closer look at HP's fundamentals reveals a cautionary tale: a low valuation does not automatically translate to a sound investment. Weak capital efficiency, margin compression, and a history of missing earnings guidance paint a picture of a company struggling to justify its "cheap" label.

Capital Efficiency: A Declining Engine of Growth

HP's return on invested capital (ROIC) and return on equity (ROE) metrics underscore its inability to generate sustainable returns. While ROIC peaked at 119.76% in early 2020, it has since plummeted to 47.32% in April 2025, reflecting a sharp decline in capital productivity. Meanwhile, ROE has remained deeply negative for years, hitting -330.98% in 2021 and -198.85% in 2025. These figures highlight a critical flaw: HP is not only failing to reward shareholders but also struggling to deploy capital effectively.

The disconnect between HP's low P/E and its poor capital efficiency raises a red flag. A company with a low valuation should ideally demonstrate strong returns on invested capital, but HP's metrics suggest the opposite. Investors must ask: Is the market pricing in a future where HP can reverse these trends, or is the low P/E masking structural weaknesses?

Margin Contraction: A Silent Erosion of Profitability

HP's operating margin has contracted from a peak of 8.32% in January 2022 to 5.71% in April 2025, despite management's cost-cutting efforts. The gross margin, while showing some improvement to 21.15%, remains volatile, with a 3.56% year-over-year decline in Q2 2025. These trends indicate that HP is grappling with rising costs—particularly from U.S. tariffs and supply chain disruptions—and limited pricing power in its core markets.

The company's recent Q2 2025 results exemplify this struggle. Despite a 3.3% revenue increase to $13.2 billion, GAAP diluted EPS fell 31% to $0.42, and non-GAAP EPS dropped 13% to $0.71. HP attributed the shortfall to trade-related costs and operational inefficiencies, but the persistent margin compression suggests these challenges are not easily mitigated. For long-term investors, the question is whether HP can stabilize its margins or if the trend will continue to erode profitability.

Earnings Guidance: A History of Disappointments

HP's earnings guidance has been a consistent source of concern. Over the past five years, the company has missed analyst estimates in 10 of the last 12 quarters, with the most recent Q2 2025 report marking a 11.3% miss in non-GAAP EPS. The downward revision of full-year 2025 guidance—from $3.06–$3.36 to $3.00–$3.30—further underscores management's lack of confidence.

This pattern of underperformance is not isolated. HP's compound annual growth rate (CAGR) for operating income and revenue has been negative (-7% and -6%, respectively) over the past 13 years. While net income has shown a projected CAGR of 7% for the next three years, this optimism is tempered by the company's reliance on non-recurring adjustments (e.g., restructuring charges) to mask underlying weaknesses.

The "Cheap" Trap: Valuation vs. Fundamentals

HP's low P/E ratio may attract value hunters, but it fails to account for the company's deteriorating fundamentals. A stock's valuation should reflect its ability to generate future cash flows, and HP's weak capital efficiency, shrinking margins, and earnings misses suggest a bleak outlook. The market's willingness to assign a low multiple to HP's earnings may stem from a lack of growth expectations, but this also means there is little upside potential for long-term investors.

Investment Implications

For long-term investors, HPQ presents a high-risk proposition. The company's struggles with capital allocation, margin stability, and earnings predictability make it a poor candidate for buy-and-hold strategies. While HP's low P/E ratio is tempting, it is a reflection of market skepticism rather than a sign of undervaluation. Investors should prioritize companies with stronger capital efficiency, consistent margin expansion, and a track record of meeting earnings expectations.

In conclusion, HP's "cheap" valuation is a mirage. The fundamentals—declining returns, eroding margins, and a history of earnings misses—undermine its appeal as a long-term investment. Until HP can demonstrate a clear path to reversing these trends, it remains a high-risk bet for patient capital.