Source: PaxForex Premium Analytics Portal, Fundamental Insight

HP's stock witnessed a decline of 4% in after-hours trading on May 30 after the company released its latest earnings report. The report revealed that for the second quarter of fiscal 2023, which concluded on April 30, HP's revenue dropped by 22% year over year, amounting to $12.9 billion. This figure fell short of analysts' expectations by $130 million. Additionally, the company's adjusted earnings per share (EPS) experienced a decline of 26% to $0.80, although it still exceeded the consensus forecast by $0.04.

While HP's headline numbers may have disappointed investors, they were not entirely unexpected. The company witnessed significant growth during the pandemic as a result of increased demand for PCs for remote work, online learning, and gaming. However, as the world transitioned into a post-pandemic phase, this momentum subsided.

Despite experiencing a cyclical slowdown, HP's stock has already seen a significant decline of over 20% in the past year. Currently, it trades at a modest valuation of just 9 times its projected earnings per share (EPS) for fiscal 2023. Additionally, the company offers a decent forward dividend yield of 3.4%. Given these factors, should investors consider buying HP as a defensive income investment during the ongoing bear market?

During the second quarter, HP's personal systems unit, which specializes in selling desktops, notebooks, and workstations, contributed 64% of its total revenue. The remaining 36% came from its printing unit, which focuses on printers, supplies, and supply subscriptions. Both of these businesses have experienced contraction over the past years, resulting in HP's revenue declining year over year for four consecutive quarters.

The personal-systems unit of HP encountered challenges in the second quarter, primarily due to declining sales of consumer and commercial PCs. Although its commercial printing revenue saw a slight increase, this growth was offset by declining sales of consumer printers and supplies.

During the conference call, CEO Enrique Lores acknowledged that HP was facing "industrywide headwinds" that were impacting both its core and growth markets. The company's slowdown was further aggravated by currency headwinds, which resulted in a 4% reduction in reported growth for personal systems and a 3% reduction in printing revenue during the quarter.

While HP did not provide specific revenue guidance, Lores expressed optimism regarding the second half of the year. He expects improved performance in the personal systems division, driven by enhanced channel inventory and seasonal factors. This outlook suggests that HP anticipates a stronger performance in the latter half of the year compared to the first half.

According to analysts' projections, HP's outlook aligns with expectations of a 7% year-over-year decline in revenue for the third quarter and a 12% drop for the entire year. This suggests that HP has yet to reach its lowest point in the current cycle, but it may reach that nadir by the end of the year.

Instead of passively waiting for the PC and printing markets to bottom out, HP has taken proactive measures to cut costs and streamline its business operations. The company introduced its Future Ready Transformation Plan in November, which focuses on digitizing business processes to enhance productivity and reduce operating expenses. Furthermore, HP is rationalizing its range of unique PC models while introducing new products targeting high-growth markets such as hybrid work, gaming, industrial graphics, and 3D printing. In an effort to expand its customer base, HP is also diversifying its subscription-based ecosystem beyond its Instant Ink service by introducing new subscriptions for paper, printing hardware, and hybrid work devices.

As part of the restructuring efforts, HP intends to decrease its workforce by 4,000 to 6,000 employees, which represents 7% to 10% of its current workforce, by the end of fiscal 2025. Additionally, the company plans to temporarily reduce its share buybacks to allocate more funds toward its optimization plans and initiatives. These measures are aimed at positioning HP for improved performance and efficiency in the future.

HP's adjusted operating margin experienced a slight contraction of 10 basis points year over year, settling at 8.7% in the second quarter. However, there was a sequential expansion of 90 basis points compared to the first quarter. Despite this stabilization, HP anticipates a decline of 13% to 22% in adjusted earnings per share (EPS) year over year for the third quarter and a decrease of 14% to 19% for the full year.

For instance, Cisco trades at 12 times forward earnings and offers a forward yield of 3.1%, all while demonstrating growth in revenue and profits. Similarly, IBM, which recently divested Kyndryl and is experiencing renewed growth, trades at 13 times forward earnings and provides an even higher forward dividend yield of 5.2%.

Therefore, while HP is not a poor investment choice, it is not recommended to purchase the stock at present when there are several other high-quality blue-chip tech stocks available at discounted prices.

As short as the price is above 28.50, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 29.28
• Take Profit 1: 31.00
• Take Profit 2: 33.00

Alternative scenario:

If the level of 28.50 is broken-down, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 28.50 
• Take Profit 1: 27.50
• Take Profit 2: 26.80