Xerox Holdings Q2 Earnings Preview: Strategic Turnaround and Undervalued Potential in the Productivity Tech Sector

The productivity tech sector is undergoing a profound transformation, driven by the convergence of artificial intelligence (AI), agentic AI, and application-specific semiconductors. Amid this backdrop, Xerox Holdings Corporation (NASDAQ: XRX) stands at a critical juncture, balancing the legacy of its print-centric origins with an ambitious reinvention strategy. As the company prepares to release its Q2 2025 earnings on July 31, the focus will be on whether its strategic initiatives—centered on AI-driven services, operational efficiency, and global expansion—can unlock value in a market that has historically undervalued its potential.

Strategic Reinvention: From Print to Digital Ecosystems

Xerox's transformation has been anchored in two pillars: services-led innovation and operational restructuring. The 2025 acquisition of Lexmark expanded its global footprint and bolstered its ability to deliver hybrid workplace solutions. By integrating AI into platforms like the PrimeLink B9100 Series Press and FreeFlow Workflow Software, Xerox aims to position itself as a provider of digitized, client-centric services rather than a commodity printer manufacturer. This shift aligns with broader industry trends, as McKinsey's 2025 Technology Trends Outlook notes that AI is no longer a standalone innovation but a foundational driver of productivity gains across sectors.

However, the path to profitability is fraught with challenges. Xerox's Q1 2025 results revealed a GAAP net loss of $0.75 per share, though this marked an improvement from $0.94 in Q1 2024. The company's adjusted operating margin of 1.5%—a 70-basis-point decline year-over-year—highlights the difficulty of balancing reinvestment in growth opportunities with near-term profitability. Yet, the IT Solutions segment, which reported a 121.6% revenue increase in Q1, offers a glimpse of progress. This segment, focused on digital services and software, now accounts for a growing portion of Xerox's revenue, signaling a transition toward higher-margin offerings.

Valuation Metrics: A Tale of Contradictions

Xerox's valuation metrics paint a complex picture. The company's trailing P/E ratio is negative (-0.58), reflecting its recent losses, but its forward price-to-sales ratio of 0.11 suggests significant undervaluation relative to peers. For context, HP Inc. (HPQ) trades at a P/E of 9.69, while IBM (IBM) commands a P/E of 41.38. Xerox's market cap of $745 million, despite a 49.70% decline over the past 12 months, implies a discount that may not fully account for its strategic pivot.

The disconnect between Xerox's valuation and its industry peers is partly attributable to skepticism about its ability to sustain growth. Analysts project revenue growth of 12.8% annually, outpacing the U.S. market's 9%, but this falls short of “high-growth” benchmarks (20%+). Moreover, the company's Return on Equity (ROE) is forecast to remain low at 18.09% over the next three years, raising questions about its profitability trajectory. Yet, these metrics must be contextualized within the broader productivity tech sector, where AI-driven companies are commanding premium valuations despite similar early-stage risks.

Navigating the Productivity Tech Landscape

The productivity tech sector in 2025 is defined by a race to integrate AI into workflows, automate repetitive tasks, and reduce operational friction. Deloitte's Technology Outlook 2025 underscores that tech firms are leading the charge in generative AI adoption, particularly in IT and R&D. Xerox's focus on AI-enhanced software and services positions it to benefit from this trend, but its success hinges on execution.

One key differentiator is Xerox's capital allocation strategy. The company has prioritized reinvestment in IT and digital services, while maintaining a dividend of $0.25 per share. This balance between shareholder returns and growth capital is rare among firms in reinvention phases. Additionally, Xerox's updated operating model—aimed at improving efficiency and margins—could stabilize cash flows, which stood at $109 million in Q1 2025 despite revenue declines.

Risks and Opportunities

Investors must weigh several risks. Xerox's extensive debt load and a Piotroski F-Score of 3.00 (indicating weak financial strength) suggest vulnerability to economic shocks. The company's reliance on the IT Solutions segment, while promising, also introduces concentration risk. Furthermore, the productivity tech sector is highly competitive, with rivals like HP and Canon aggressively expanding their AI capabilities.

Yet, the potential rewards are substantial. If Xerox can sustain its momentum in IT Solutions and demonstrate measurable improvements in operating margins, its current valuation could represent a compelling entry point. The company's strategic alignment with AI-driven productivity trends, coupled with its global distribution network, provides a foundation for long-term growth.

Conclusion: A Calculated Bet on Reinvention

Xerox's Q2 2025 earnings will serve as a critical test of its reinvention strategy. While the company faces significant headwinds, its pivot to software-enabled services and AI-driven solutions places it at the intersection of a transformative sector. For investors, the key question is whether Xerox can convert its strategic initiatives into consistent profitability.

Given the current valuation and the sector's appetite for AI-driven innovation, a cautious long-term position in XRX could be justified for those comfortable with the risks. However, patience will be essential. The company's success will depend not only on its ability to execute its reinvention but also on broader macroeconomic factors, including interest rates and global demand for digital services.

In a world where productivity gains are increasingly tied to AI and digital transformation, Xerox's journey offers a compelling case study in corporate reinvention. The upcoming earnings report will provide a clearer lens through which to assess whether the company is on the cusp of unlocking its undervalued potential—or if the market's skepticism will persist.