HP (HPQ) Q2 2025 Earnings: A Miss with Mixed Signals for Long-Term Investors

HP Inc. (HPQ) delivered a mixed performance in its Q2 2025 earnings report, posting a 3.3% year-over-year revenue increase to $13.2 billion while reporting a sharp decline in both GAAP and non-GAAP earnings per share (EPS). The results, coupled with a Zacks Rank #4 (Sell) rating, raise critical questions for long-term investors: Can HP's strategic cost-cutting and growth in the Personal Systems segment offset its declining profitability and macroeconomic headwinds? And does the Zacks rating accurately reflect the company's operational resilience and future potential?

Earnings Analysis: Growth vs. Profitability

HP's Q2 revenue growth was driven by a 7% increase in the Personal Systems segment, fueled by AI PC adoption, product launches, and the Windows 11 refresh cycle. The Commercial PS segment, in particular, rose 9%, while the Consumer PS segment grew 2%. However, the Printing division dragged performance, with a 4% year-over-year revenue decline, driven by soft consumer demand in China and weaker Supplies revenue.

Despite the top-line growth, HP's GAAP EPS fell 31% to $0.42, and non-GAAP EPS dropped 13% to $0.71—both below the company's own guidance. Free cash flow turned negative at $(95) million, and net operating cash flow was a modest $38 million. Shareholders received $400 million in returns via dividends and buybacks, but the company's $2.7 billion in gross cash reserves highlight a reliance on liquidity rather than robust operating cash flow.

The disconnect between revenue growth and profitability underscores a key challenge: HP's cost-cutting initiatives, while lauded by management, have not yet translated into improved margins. The Printing segment's struggles, in particular, reflect structural issues in a market where commoditization and shifting consumer behavior are eroding margins.

Strategic Initiatives: Can AI and Expansion Offset Weakness?

HP's long-term strategy hinges on AI-driven innovation and geographic expansion. The launch of AI PCs like the OmniBook Ultra Flip and EliteBook X 14-inch Next-Gen models has been well-received, with management citing strong demand for AI-powered hardware. Additionally, the company is expanding its manufacturing footprint to reduce costs and mitigate supply chain risks, a move that could stabilize margins in the long term.

However, these initiatives face headwinds. The Printing division's decline—despite growth in Big Tank printers—suggests that HP's traditional hardware business is struggling to adapt to a post-pandemic shift toward cloud-based solutions and remote work. Meanwhile, macroeconomic factors like high interest rates and inflation are dampening enterprise IT spending, which impacts both Commercial PS and Printing segments.

Zacks Rank #4: A Harsh Verdict or Realistic Outlook?

The Zacks Sell rating is rooted in HP's consistent earnings misses over the past four quarters, with an average negative surprise of 4.3%. While the company's Q3 2025 guidance for non-GAAP EPS ($0.68–$0.80) reflects a modest 9.6% decline year-over-year, the lack of positive estimate revisions and a neutral Earnings Surprise Potential (ESP) of 0.00% reinforce the rating.

Critically, the Zacks model also accounts for broader macroeconomic risks. HP's exposure to global demand cycles—particularly in the Printing segment—makes it vulnerable to prolonged economic weakness. The company's forward P/E ratio of 10.18, while attractive on paper, is offset by a PEG ratio of 2.51, suggesting the stock is overvalued relative to its growth trajectory.

Investment Implications: Balancing Optimism and Caution

For long-term investors, HP's Q2 results present a paradox. The Personal Systems segment's growth in AI PCs and enterprise hardware offers a compelling narrative, but the Printing division's decline and weak cash flow metrics raise red flags. The Zacks Sell rating, while harsh, is not entirely unwarranted given HP's earnings volatility and macroeconomic risks.

However, HP's strategic focus on cost reduction, AI innovation, and manufacturing expansion could stabilize its business over time. Investors willing to tolerate short-term volatility might find value in HP's discounted valuation and its potential to outperform in a sector where operational efficiency is paramount.

Final Verdict

HP's Q2 earnings highlight a company in transition. While the Personal Systems segment demonstrates resilience, the Printing division's struggles and macroeconomic headwinds weigh heavily on profitability. The Zacks Sell rating reflects these challenges but may underestimate HP's ability to adapt through AI-driven innovation and cost discipline.

For investors, the key question is whether HP can sustain its cost-cutting momentum and capitalize on AI PC demand to offset Printing's decline. If the company can stabilize its cash flow and deliver on its strategic initiatives, HPQ could offer long-term upside. However, in the near term, the Zacks rating serves as a cautionary signal: patience and a medium-term horizon may be required to unlock value.

Investment Advice: Consider a cautious "Hold" position for HPQ. Monitor Q3 results for signs of improved cash flow and guidance clarity. Long-term investors with a focus on AI-driven hardware growth may find opportunities, but short-term volatility and macroeconomic risks warrant prudence.