Dell's CEO says demand for PCs has risen permanently from where it was before the pandemic.
Bing Guan/BloombergThe upbeat earnings reports late Tuesday from Dell Technologies and HP Inc. stem from surprising strength in the commercial market for personal computers, and both expect strong demand to continue into 2022 and beyond.
There is no question that PC growth has slowed from the torrid pace during the heart of the pandemic, when consumers suddenly forced to work or attend school from home scrambled to buy more laptops. And the companies say they are seeing continuing parts shortages and higher-than-normal shipping costs.
But as more workers return to the office and the pace of enterprise technology spending increases, the dynamic favors continued strength in the sector. Both companies have higher than normal levels of order backlogs, demand that should eventually turn into revenue. Adding to the appeal of the stocks is that both companies offer shareholders aggressive capital-return programs.
Shares of both companies were rising on Wednesday.
For its fiscal fourth quarter, ended Oct. 31, HP (ticker: HPQ) posted revenue of $16.7 billion, $1.3 billion above the Street consensus call. Profits likewise beat expectations. Most of the outperformance came from the company’s PC business, which grew13% in the quarter, with a 3% decline in consumer PC revenue more than offset by a 25% jump in commercial PCs.
The revenue outperformance stemmed entirely from higher average selling prices. Unit sales overall were down 9% from a year ago, with notebooks off 12% relative to the elevated level seen in the midst of the Covid crisis a year earlier. Desktops were up 2%.
HP’s fourth quarter non-GAAP profit guidance calls for 99 cents to $1.05 a share, above the old consensus call for $1.04. Management reiterated its recent forecast for full-year fiscal 2022 non-GAAP profits of $4.07 to $4.27 a share.
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Dell (DELL) showed a similar pattern. Revenue for its fiscal third quarter, ended Oct. 31, was $28 billion, about $1 billion ahead of the Wall Street analyst consensus, a result driven entirely by better-than-expected 35% growth in its PC business, including 40% growth in commercial PC revenue. Dell is projecting January quarter revenues of between $27 billion and $28 billion, well ahead of the old consensus forecast for $26.2 billion.
Both companies say they expect robust demand for PCs to continue.
HP CEO Enrique Lores told Barron’s in an interview that demand for the company’s PCs is outstripping supply, and that he expects continued strength in both PCs and printers as offices continue to reopen. CFO Marie Myers said the company finished the quarter with a higher-than-normal order backlog, in particular in PCs.
Dell CFO Tom Sweet said in an interview that global PC demand has permanently ratcheted higher from where it was before the pandemic—a claim HP’s Lores has made in the past as well. Sweet says that what was once a global market of about 270 million units now appears on track to be 340 million units or more.
Sweet sees multiple factors underpinning demand. At least 70 million units currently in use are four years old or more, making them due for replacement, while the rollout of Windows 11 will force some people to replace aging hardware, he said.
Heading into the pandemic, he said, consumers owned just over one PC per household, but the ratio has changed to one PC per person in many households. PC demand will also benefit from a shift at many companies away from desktops to laptops, which have a shorter useful life.
UBS analyst David Vogt said in a research note Wednesday that both companies are benefiting from higher prices. Average selling prices were up almost 5% sequentially in the quarter for Dell and more than 6% for HP. One reason for that, he says, is reduced discounting, likely a result of tighter supplies. He maintained Buy ratings on both stocks.
Citi analyst Jim Suva is bullish on both stocks as well. “We recognize the investor skepticism about both PC and printing demand as, yes, many did purchase laptops and home printers during Covid, but we believe the handoff to enterprise strength as workers return to the office in a hybrid manner will boost commercial PC demands for multiple quarters,” he said in a note on HP’s results. The “entire PC industry is showing more pricing discipline … boosting profit margins and cash flow,” Suva wrote.
Both companies offer attractive capital-return plans. HP bought back $1.8 billion of stock in the latest quarter, boosting the total for the fiscal year to $6.2 billion. Management vowed to buy back least another $4 billion of stock in fiscal 2022. The company recently boosted its dividend to $1 annually from 78 cents, giving the stock a yield of about 2.5% yield.
Dell, meanwhile, said at a recent meeting with analysts that it expects to return 40% to 60% of its adjusted free cash flow to holders in buybacks and dividends. That is expected to include at least $1 billion a year in dividends, the company said, a figure that would give Dell a yield in line with HP’s at around 2.5%.
Both stocks also offer relatively modest valuations. HP trades for about 8 times the company’s non-GAAP profit forecast for the October 2022 fiscal year, while Dell trades at a similar ratio.
Investors are rediscovering the PC stocks as rising interest rates weigh on the shares of high-growth, highly valued tech companies. Dell was up 4.6% to $57.20 late on Wednesday morning, while HP had gained 10.3% to $35.53.
Write to Eric J. Savitz at eric.savitz@barrons.com
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