HP's Strategic Shift and Financial Ambition: Can $3.5 Billion in Free Cash Flow by 2028 Justify the Valuation?

HP Inc. has positioned itself at the intersection of technological transformation and financial discipline, setting an ambitious free cash flow (FCF) target of over $3.5 billion by fiscal 2028. This goal, announced as part of its long-term strategic framework, raises critical questions for investors: Do HP's current valuation—supported by a price-to-free cash flow (P/FCF) ratio of 9.41 and an enterprise value-to-free cash flow (EV/FCF) ratio of 12.19, as reported in HP's Q3 report—justify the risks and opportunities inherent in its strategic pivot toward AI, cloud, and supply chain resilience?

Financial Performance: A Mixed Picture

HP's fiscal 2025 third-quarter results highlight both progress and challenges. The company generated $1.5 billion in FCF, a 13% year-over-year increase, while full-year guidance of $2.6–$3.0 billion aligns with its trajectory toward the 2028 target. However, operating margins have contracted—GAAP margins fell to 5.1%, and non-GAAP to 7.1%, down 1.9 and 1.1 percentage points, respectively. This margin compression reflects ongoing pressures in its Printing segment, which saw a 3.8% revenue decline in Q3 2025, as noted in the Citi conference transcript, offset by growth in AI PCs and Windows 11 adoption in the Personal Systems division.

The company's trailing twelve-month FCF of $2.84 billion and 2024's $3.157 billion, according to the Macrotrends FCF chart, suggest a need for sustained growth to reach $3.5 billion by 2028. Analyst projections, including a $3.58 billion FCF estimate for 2026, indicate optimism, but achieving a 14% compound annual growth rate (CAGR) from 2025 to 2028 will require navigating headwinds such as geopolitical supply chain disruptions and pricing pressures in the printing market.

Strategic Initiatives: AI, Cloud, and Operational Resilience

HP's strategic investments in AI and cloud infrastructure are central to its growth narrative. The acquisition of Humane's AI assets, including the Cosmos platform and 300+ patents, underscores its commitment to AI-driven solutions. Meanwhile, 25% of its PC mix has already transitioned to AI-enabled devices, ahead of schedule, capitalizing on the Windows 11 refresh cycle. These moves align with a broader industry trend: the global AI market is projected to grow at a 29% CAGR through 2028, according to a Forbes analysis, with enterprise demand for edge computing and real-time analytics accelerating.

Supply chain diversification is another pillar. By shifting 90% of North American production out of China by 2025, HP aims to mitigate tariff risks and geopolitical volatility. This strategy, however, comes with short-term costs, as seen in Q3 2025's $73 million negative FCF for the April 2025 quarter, likely tied to transitional expenses.

Cost-cutting under the "Future Ready" plan has bolstered gross annual run rate savings to $1.9 billion, while subscription-based models in printing aim to stabilize margins. These measures, combined with a commitment to return 100% of FCF to shareholders (provided leverage stays below 2%), reflect a disciplined approach to capital allocation.

Market Dynamics and Competitive Risks

The competitive landscape for AI and cloud services is intensifying. Hyperscalers like AWS, Microsoft, and Google dominate the cloud market, projected to reach $723.4 billion in 2025, while emerging players such as Oracle and DeepSeek are challenging incumbents with cost-effective AI models. HP's focus on AI PCs and edge computing positions it to benefit from decentralized infrastructure trends, but its Printing segment remains vulnerable to commoditization and margin erosion.

Geopolitical risks, including U.S. trade regulations and high interest rates, further complicate HP's path. The company's leverage forecast of 2.1x EBITDA for 2025 suggests financial flexibility, but rising tariffs and supply chain costs could pressure profitability. Additionally, the integration of Humane's AI assets and scaling of AI PCs—critical to meeting FCF targets—carry execution risks.

Valuation Benchmarks: A Tech Sector Context

HP's valuation multiples must be evaluated against industry peers. While the broader Technology Sector has a P/E ratio of 43.48 in Q2 2025, according to CSIMarket data, HP's P/FCF of 9.41 and EV/FCF of 12.19 appear undemanding compared to AI SaaS platforms, which command 8–12x revenue multiples, per a SaaS valuation study. However, these benchmarks vary by niche: AI infrastructure and developer tools often see higher valuations due to network effects, whereas HP's hardware-centric model faces different dynamics.

For context, the average EV/FCF for AI cloud companies in 2025 is not explicitly stated, but M&A activity in the sector suggests a premium for transformative technologies (25.8x revenue multiples). HP's current multiples, therefore, may reflect a discount to its growth potential, particularly if it successfully monetizes AI PCs and subscription services.

Conclusion: A Calculated Bet on the Future

HP's $3.5 billion FCF target by 2028 hinges on its ability to execute on AI innovation, supply chain resilience, and cost discipline. While the company's current valuation appears reasonable relative to peers, the path to its goal is not without risks. Key uncertainties include the integration of AI assets, the pace of AI PC adoption, and the ability to offset Printing segment declines.

For investors, the critical question is whether HP can maintain its FCF growth trajectory while navigating macroeconomic and competitive pressures. If the company succeeds in leveraging its strategic initiatives to capture AI-driven demand and sustain margins, its valuation multiples could expand, justifying the 2028 target. However, failure to scale AI PCs or mitigate supply chain costs could leave the target unmet, challenging the current valuation's rationale.