HP Inc – Investing from Real Value | Digitalization

Investors who follow Warren Buffett may have heard that Berkshire Hathaway recently sold another 3 million HP shares after previously selling 5 million. With these actions, Berkshire's stake in HP has fallen to 10%.

HP's chairman and CEO, Enrique Lores, sold 76,000 shares of the company without buying any additional shares in the past 12 months.

However, HP has some factors that Buffett might be interested in. HP has a 12-month GAAP price-to-earnings (P/E) ratio of 11.21 times, less than half the industry average P/E ratio of 24.71 times. In addition, HP's projected annual dividend yield is 4.03%, significantly higher than the technology industry average of 1.025%. These numbers all make HP attractive.

Currently, HP Inc.'s true value proposition is upgraded PCs powered by AI. To remain the top value choice today, HP needs a plan to drive future growth. HP can continue to thrive if the PC (personal computer) market also evolves.

This technology segment experienced a weak period in 2022, but according to Mikako Kitagawa, research director at Gartner, the end of this trend is clearly visible. "There is evidence that the decline in the PC market has finally bottomed out," Kitagawa stated, citing the "consistent progress" PC vendors have made in reducing inventory in the third quarter of 2023.

Wamsi Mohan, a stock analyst at Bank of America, seems undeterred as he upgraded HP stock from "Sell" to "Buy" and simultaneously raised his price target from $25 to $33.

Mohan believes that "improving prospects in the PC sector and lower restructuring costs will help increase free cash flow" for HP. This also aligns with IDC's estimate that PC shipments will increase 3.7% year-over-year in 2024.

If the PC market grows as predicted, a key factor that could help HP thrive is its relationship with Nvidia, a popular manufacturer of artificial intelligence chips. HP recently unveiled an AI workstation.

According to the company, this workstation will "simplify the process of building and customizing internal artificial intelligence models and applications." HP also announced that (as reported by Barron's) it will "offer the first workstations with Nvidia's AI enterprise software platform."

HP's valuation seems reasonable, and the company also pays a fairly ideal dividend. Furthermore, its partnership with Nvidia is valuable. Therefore, the best counter-trend trade right now is the opposite of what Buffett is doing.