Is HPQ Trading at a Compelling Discount Amid Earnings Softness?

For value investors, the allure of undervalued stocks often lies in the interplay between discounted metrics and the potential for margin of safety. HP Inc. (NYSE: HPQ) appears to fit this mold, with its current valuation multiples, structural cost savings, and strategic AI-driven product shifts creating a compelling case for selective investors. However, the company's cyclical exposure and margin pressures demand careful scrutiny.

Undervaluation: A Numbers-Driven Case

HP's forward price-to-earnings (P/E) ratio of 8.82× is starkly lower than the S&P 500's 25.63× and its peers' mid-teens valuations, according to a report by Finimize. Its enterprise value-to-sales (EV/Sales) multiple of 0.55× also lags its five-year average of 0.64× and the market average of 4.48×, suggesting potential upside if revenue stabilization and margin improvements materialize according to the same report. While HP's Q3 2025 EBITDA of $1.26 billion fell short of analyst estimates, the company's free cash flow of $1.5 billion-aligned with its $2.6–$3.0 billion annual guidance-demonstrates resilience amid margin pressures as reported by HP's investor relations.

The CFO, Karen Parkhill, emphasized that working capital improvements and lower restructuring costs will sustain free cash flow, even as the Printing segment faces structural declines according to a financial analysis. This duality-growth in AI-enabled PCs (AIPCs) offsetting print segment erosion-positions HP as a hybrid play between cyclical hardware and higher-margin innovation.

Structural Cost Savings: A Foundation for Margin Expansion

HP's cost-cutting initiatives are central to its value proposition. The company is on track to achieve $2 billion in annualized gross run-rate savings by fiscal 2025 through manufacturing shifts, process automation, and supply chain diversification as stated in the earnings call. These savings, coupled with $1 billion in projected reductions by 2028, are expected to bolster profitability and operational flexibility as reported in financial analysis.

Notably, HP's Q3 free cash flow of $1.5 billion-up 13% year-over-year-reflects the efficacy of these measures according to the earnings report. Shareholder returns, including $0.4 billion in Q3 through dividends and buybacks, further reinforce its commitment to capital allocation as detailed in the Q3 results.

Yet, the $7,000 workforce reductions planned through 2028 raise questions about long-term innovation capacity and employee morale according to industry analysis. Critics argue that such aggressive cuts risk eroding institutional knowledge, particularly as HP pivots toward AI-driven products as highlighted in a critical analysis.

AI-Enabled Product Shifts: A Double-Edged Sword

HP's pivot to AI PCs (AIPCs) represents a strategic bet on premium pricing and margin expansion. These devices, expected to command a 5–10% price premium, are already driving growth in the Commercial segment, which saw an 11% unit sales increase in Q2 2025 according to the Q2 earnings report. However, the company's foray into consumer AI-exemplified by the failed Humane AI Pin acquisition-highlights execution risks. The discontinuation of the AI Pin not only generated customer dissatisfaction but also underscored the challenges of scaling speculative AI ventures as reported in industry analysis.

The integration of agentic AI systems across product design, supply chain, and customer support aims to create operational efficiency as noted in a workforce analysis. Yet, the success of this strategy hinges on upskilling remaining employees and avoiding over-reliance on automation-a balance that remains untested at scale as critiqued in a comprehensive analysis.

Balancing Risks: Cyclicality and Margin Pressures

Despite its cost discipline, HP remains exposed to cyclical downturns in the PC and printer markets. The Printing segment, though historically high-margin (17.3% operating margin in Q3 2025), saw hardware and supplies revenue decline 4% year-over-year according to Q3 earnings data. This structural weakness necessitates that AI PC growth not only offset print segment losses but also drive overall margin expansion.

Moreover, competitive pricing pressures and component cost volatility could erode profitability. HP's EBITDA margin of 8.6% in Q3 2025 lags peers like Microsoft, which reported 15.5% one-year EPS growth according to earnings comparison data. While the company's $2.9 billion in gross cash provides a buffer as disclosed in the earnings report, investors must weigh the likelihood of sustained margin improvement against macroeconomic headwinds.

Conclusion: A Value Proposition with Caveats

HPQ's valuation multiples, structural cost savings, and AI-driven product shifts present a compelling case for value investors seeking a margin of safety. The company's free cash flow generation, coupled with a forward P/E of 8.82×, suggests upside potential if its AI strategy gains traction and cost savings translate to margin expansion. However, the risks of cyclicality, print segment declines, and execution challenges in AI integration warrant caution.

For selective investors, HPQ's current discount offers an opportunity to capitalize on a company in transition-provided they are willing to navigate the uncertainties of a high-stakes technological pivot.