HP Inc. (HPQ, Financial) has had an eventful 2020. The company witnessed the resignation of CEO Dion Weisler, a failed takeover attempt by Xerox (XRX, Financial) and Covid-19 disruptions, but it has definitely begun 2021 on a strong note after the recent acquisition of HyperX and a greater concentration on the PC peripherals and gaming devices business.
The macro for PCs and notebooks continues to be strong, backed by the remote working culture, e-learning and gaming. Printing as a segment continues its slow performance despite the acquisition of Samsung's (XKRX:005930) printing unit, the increasing push for industrial 3D printers and the Instant Ink subscription service. However, despite all these tailwinds, HP looks to be poised for a fairly decent 2021 ahead, in my view.
Financial results
HP reported revenue of $15.65 billion for the most recent quarter ended Jan. 31. This implies a 7.03% growth as compared to the $14.62 billion in revenue reported in the corresponding quarter of the prior-year quarter. The management was comfortably able to beat the analyst consensus estimate of $15 billion as a result of a 34% jump in consumer revenues and nearly a 15% jump in total unit sales.
The company had a gross margin of 21.25% and an operating margin of 9.51%, which was higher than that in the same quarter of the previous fiscal year. HP reported an Ebitda of $1.69 billion, which translated into net income of $1.07 billion.
The company's adjusted earnings per share of $0.92 outperformed the analyst consensus estimate of $0.66, and the company generated $1.02 billion in the form of operating cash flows, indicating a strong financial position.
PC peripherals and gaming growth
Apart from capitalizing on the strong macro from PCs and notebooks, HP also has another vast market that it can tap into – PC peripherals and gaming. As per the data of custom PC builder WePC, HP's management estimates that the global peripherals market should be worth $12.2 billion in 2024, and there should continue to be a phenomenal growth in gaming
Swiss competitor Logitech (LOGI, Financial) has been a heavy beneficiary of the growth in these segments, and HP aims to follow its example and capitalize on the same. The company made its first big move by carrying out the $425 million buyout of HyperX, which is Kingston Technology's gaming hardware division. HyperX has a strong brand and covers a broad range of accessories catering to a variety of video gaming systems. Its product portfolio includes keyboards, mice, headsets and console accessories, among many other categories.
As a part of the deal, Kingston will continue to own the memory and storage product lines sold under the HyperX name but HP owns the complete gaming device aspect. HP expects the deal to boost the company's profitability in 2021.
Over and above HyperX, HP's management has also been expanding its OMEN gaming brand recently.
Strong macro for PCs and notebooks
It is a popular misconception that PCs and notebooks are dying a slow death and being replaced by tablets and phones. However, I do not believe this will happen, as phones simply cannot achieve the same functionality by merit of limited visual space.
Additionally, with the work-from-home culture and the stay-at-home schooling environment, PC shipments have been on the rise. As per Gartner reports, PC shipments have risen 10.7% in Q4 2020 as compared to the same period in 2019, and HP has also benefitted during this period (a 33% jump in notebook sales).
The education industry will require a much larger penetration of PCs and notebooks in 2021 as more students are being required to purchase PCs and notebooks. Apart from remote work and web-based learning, other key drivers include increasing social media activity, consumer entertainment using PCs as a medium, web streaming, online shopping and gaming.
Canalys research predicts installed PCs and tablets to reach 1.77 billion by the end of 2021, up from 1.64 billion in 2019.
Final thoughts
As we can see in the chart above, HP's stock has more than doubled in the past year. Despite this appreciation, HP trades at lower valuation multiples when we compare it to the hardware industry as a whole. The company's enterprise-value-to-revenue ratio is 0.72 and its price-earnings ratio is around 12.97.
The slow performance of its printing business is one factor driving market pessimism. However, with the strong macroeconomic landscape in both laptops as well as PC peripherals, I believe HP shareholders have a lot to look forward to in 2021.
Disclosure: No positions.
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