HPQ's Earnings Crossroads: Can Strategic Shifts Overcome Margin Headwinds?

As HP Inc. (HPQ) prepares to report Q2 2025 earnings on May 28, investors are scrutinizing whether the tech giant's aggressive restructuring and innovation bets can offset margin erosion and geopolitical risks. With shares trading at a decade-low valuation of 7.5x forward earnings, the upcoming results could mark a turning point for this undervalued player in the AI-driven tech renaissance. Here's why HPQ's resilience story is worth betting on—if it delivers.

Earnings Outlook: Navigating Margin Pressures

HPQ's Q2 2025 guidance calls for EPS of $0.80—the midpoint of its $0.75–$0.85 range—amid a 4.3% revenue rise to $13.36 billion. Analysts expect this to align with consensus estimates, but the real test lies in margin stabilization.

Over the past year, GAAP operating margins have slumped to 6.3%, down from 7.1% in 2024, due to inflation, supply chain bottlenecks, and pricing pressures in legacy printing segments. The “Future Ready” restructuring plan, however, aims to deliver $1.9 billion in annual cost savings by 2025, including $300 million from 1,000–2,000 job cuts. Early signs are positive: Q1 2025 free cash flow surged 180% year-over-year to $100 million, putting HPQ on track to hit its $3.2–$3.6 billion annual target.

Supply Chain Diversification: Outmaneuvering Tariffs

HPQ's 90% North American sales sourced outside China by 2025—a shift from 60% in 2024—is a masterstroke to mitigate U.S. tariffs. New manufacturing hubs in Mexico, Thailand, Indonesia, and India now anchor a supply chain resilient to geopolitical volatility.

Chief Supply Chain Officer Ernest Nicholas recently declared HP “tariff-ready,” with inventory stockpiling by partners easing fears of disruptions. This geographic rebalancing isn't just defensive: it positions HPQ to capture rising demand for AI-enabled PCs and quantum-resistant printers, which require advanced manufacturing precision.

AI-Driven Growth: The $100 Billion Opportunity

HPQ's AI-first strategy is its clearest path to margin expansion. The EliteBook 8 Series, featuring NPUs for 224% better power efficiency and 43x faster AI image generation, targets high-margin enterprise and gaming markets. Management forecasts AI PCs to hit 25% of shipments in FY 2025, rising to 40–60% in two years—a trajectory that could redefine HP's premium positioning.

Meanwhile, HP LaserJet Enterprise 8000 Series printers, the first to shield against quantum computing-era cyberattacks, are gaining traction in regulated industries. Pair this with Agentic AI-powered print solutions—which use generative AI to enhance usability—and HPQ is building a recurring revenue engine through HP All-in Plans subscriptions.

Risks to Monitor—But Not Overreact To

• Juniper Acquisition Uncertainty: The DOJ's antitrust challenge to HPQ's $6.5 billion Juniper deal could delay synergies, but core AI and printer operations remain unaffected.
• Soft PC Demand in China: A 7% year-over-year drop in commercial printing revenue underscores lingering weakness, though enterprise adoption of quantum-resistant printers could stabilize this segment.
• Tariff Volatility: While HP's geographic diversification is strong, delayed AI PC adoption in budget tiers (due to Intel/AMD processor shortages) could slow near-term margin gains.

Investment Thesis: Buy the Dip at 7.5x Earnings

HPQ trades at a 2.1% dividend yield and $33 per share—well below its $34.17 consensus price target, offering 40% upside. The stock's valuation is a stark contrast to its $100 million Q1 buybacks and improving cash flow, signaling management confidence.

The key catalysts are clear:
1. Beat or meet EPS of $0.80 with margin stabilization.
2. Confirm $1.9 billion in annual savings by 2025.
3. Show AI PCs driving 25% of shipments by year-end.

If HPQ delivers, its discounted valuation and dividend yield make it a Moderate Buy for investors seeking a turnaround story in tech. The risks are real, but HPQ's execution to date—and the secular AI tailwinds—are too compelling to ignore.

Final Call: HPQ's strategic bets are aligning with a tech landscape hungry for AI innovation and supply chain resilience. With earnings just days away, now is the time to position for this comeback story.