HP Q3 Year-on-Year Growth of 13%, Earnings Forecast Exceeds Expectations but Fails to Prevent Stock Plunge; Market Focuses on PC Demand Concerns | Earnings Report Highlights

HP's quarterly results and full-year earnings guidance both exceeded analysts' expectations, but investors shifted their focus to deeper concerns about demand, causing the stock price to plunge around 10% in after-hours trading.

After the US stock market closed on August 26, HP released its fiscal third-quarter report for the period ending July 31. Total revenue grew approximately 13% year-over-year to $15.7 billion; adjusted earnings per share, excluding items such as restructuring costs, was $0.83, which included $0.11 per share in tariff refund gains.

The company expects adjusted earnings per share for the fiscal fourth quarter ending in October to be in the range of $0.69 to $0.79, higher than the average analyst estimate of $0.67.

However, investors were not convinced; the key issue lies in the "quality" of the profit guidance. HP's fourth-quarter guidance includes $0.08 per share in tariff refund gains; excluding this factor, the midpoint of the guidance is actually about $0.66, roughly $0.01 below market expectations.

In other words, the apparent upward earnings revision was largely driven by one-off or non-operating factors, rather than improvements in core business trends.

What's more concerning for the market is the outlook for PC and printer demand. In the third quarter, HP's PC business revenue grew 18%, but shipments declined 16%, indicating that revenue growth was mainly driven by price increases. The sharp rise in memory chip costs forced HP to raise prices for certain PCs and redesign some products, which may further suppress end-user demand.

In the third quarter, HP posted total sales of $15.7 billion, up about 13% year-over-year. Given the generally weak demand in the PC hardware industry, this growth rate isn't bad on the surface.

On the profitability side, the company reported adjusted earnings per share of $0.83. It's important to note that this includes $0.11 per share in tariff refund gains for the third quarter. Without this boost, core earnings performance would be significantly weaker.

HP expects adjusted earnings per share for the fourth quarter to be between $0.69 and $0.79, compared to the market average estimate of $0.67. On the surface, the company's guidance appears overall higher than expectations.

But this forecast includes a $0.08 per share contribution from tariff refunds for the fourth quarter. Excluding this effect, fourth-quarter adjusted EPS would be effectively in the range of $0.61 to $0.71, with a midpoint of about $0.66, which is actually slightly below the average analyst forecast.

For the full year, HP expects adjusted earnings per share of $3.19 to $3.29, above the market expectation of $3.05. Again, this full-year guidance also includes the impact of tariff refunds.

For investors, the issue is not whether the number is "higher," but whether this higher figure is sustainable.

The PC business was HP's most closely watched segment this quarter. In the third quarter, HP's PC division revenue rose to $11.8 billion, up 18% year-over-year. Notably, commercial models saw sales growth of 22%, serving as the main support.

But more noteworthy is the shipments side: PC shipments fell 16%. This means that revenue growth did not stem from expanded demand, but was mainly the result of price hikes and product mix changes.

HP is facing significant pressure from soaring memory chip costs, which has prompted the company to raise prices for multiple PC models and redesign some products.

In the short term, price increases can support revenue and profit margins; but in the medium to long term, end consumers and enterprise clients may delay purchases due to "sticker shock," dragging down shipments.

The printer business delivered relatively flat results. In the third quarter, HP's printing division revenue was $3.9 billion, down 2% year-over-year, basically in line with market expectations.

Compared to the PC business, the printing segment didn't see significant price-driven growth and was not a highlight this quarter. For HP, printers and supplies have long been a key profit source, but currently, this business still faces weak demand and structural pressures.

Following the earnings release, HP's stock fell about 10% after hours, having closed at $30.52 in regular trading. Year-to-date up to the earnings report, HP's stock had already gained 37%.

This means the market had already partly priced in the expectation of "a July quarter better than feared" before the report. Morgan Stanley analysts had pointed out before the results that investors already expected HP to post results "better than previously feared," with the real focus shifting to whether trends in the PC and printer markets are deteriorating.

Analysts at J.P. Morgan also believe that until HP provides guidance for the next fiscal year, shareholders may not be truly reassured. Although this report presents higher profit forecasts, it does not eliminate market concerns about demand, costs, and pricing flexibility for the coming year.

The key issue in this HP earnings report is not "whether there is growth," but rather the quality of this growth.

On the one hand, the company delivered double-digit revenue growth, PC sales rose sharply, and full-year profit guidance was also above expectations; on the other hand, PC shipments fell significantly, profits were boosted by tariff refunds, and the printer business remained sluggish.

For a hardware company, price increases can improve revenue and profits in the short term, but if units sold continue to decline, the market will worry that price hikes are cannibalizing future demand. This is precisely the challenge HP is currently facing: cost pressures drive higher prices, which in turn may hold back demand.

Before guidance for the next fiscal year is released, investors will focus on three key issues with HP: whether PC shipments can stabilize, whether memory cost pressures will ease, and whether the company's core earnings can be maintained once the boost from tariff refunds fades.