HP's Q3 earnings grew 13% year-over-year, exceeding profit forecasts, but this still couldn't prevent a sharp drop in its stock price; the market focuses on concerns about PC demand | Earnings Report Insights

HP's quarterly results and full-year earnings guidance both exceeded analysts' expectations, but investors turned their attention to deeper demand concerns, and the stock price subsequently plunged by about 10% in after-hours trading.

After the US stock market closed on August 26, HP released its third fiscal quarter report ending July 31, with total revenue increasing by approximately 13% year-over-year to $15.7 billion; earnings per share excluding restructuring costs and other items were $0.83, including $0.11 per share in tariff refunds.

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

However, investors were not convinced, mainly due to the "quality" of the profit guidance. HP's fourth-quarter guidance included a tariff refund of $0.08 per share; excluding this factor, the median guidance was actually about $0.66, lower than the market expectation of about $0.01.

In other words, the apparent upward revision of profits largely stems from one-off or non-operating factors, rather than improvements in core business trends.

What worries the market even more is the outlook for PC and printer demand. In the third fiscal quarter, HP's PC revenue grew by 18%, but shipments declined by 16%, indicating that revenue growth was mainly driven by price increases. A significant rise in memory chip costs has forced HP to raise prices on some PCs and redesign products, which could further suppress end-user demand.

Revenue grew by double digits, and profits were boosted by tariff refunds.

In the third fiscal quarter, HP achieved total sales of $15.7 billion, an increase of approximately 13% year-on-year. Given the current weak overall demand in the PC hardware industry, this growth rate does not appear bad on the surface.

In terms of earnings , the company's adjusted earnings per share were $0.83. It's important to note that this includes a $0.11 tariff refund per share from the third fiscal quarter. Excluding this revenue, core earnings would be significantly weaker.

HP expects adjusted earnings per share of $0.69 to $0.79 for the fourth fiscal quarter, compared with the market average expectation of $0.67. On the surface, the range given by the company is higher than expected.

However, this forecast includes a tariff refund contribution of $0.08 per share in the fourth fiscal quarter. Excluding this impact, the adjusted EPS for the fourth fiscal quarter would be between $0.61 and $0.71, with a median of approximately $0.66, slightly below the average analyst expectation.

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

For investors, the question is not whether the numbers are higher, but whether such a higher number is sustainable.

PC business revenue grew by 18%, but shipments declined by 16%.

The PC business was HP's most watched segment this quarter. In the third fiscal quarter, HP's PC division revenue increased to $11.8 billion, a year-over-year increase of 18%. Among them, sales of commercial models grew by 22%, becoming the main driver.

However, the sales volume is more noteworthy: PC shipments declined by 16%. This means that revenue growth did not come from increased demand, but rather from price increases and changes in product mix.

HP is facing pressure from a sharp rise in memory chip costs, leading the company to raise prices on several PC models and redesign some products.

In the short term, price increases can support revenue and profit margins; however, in the medium to long term, end consumers and corporate clients may postpone purchases due to "price shocks," thereby dragging down shipments.

The printer business performed relatively modestly. In the third fiscal quarter, HP's printing revenue was $3.9 billion, a 2% year-over-year decrease, largely in line with market expectations.

Compared to the PC business, the printing business did not see significant price-driven growth and did not become a highlight this quarter. For HP, printers and consumables have long been an important source of profit, but this business is currently facing weak demand and structural pressures.

Why did the stock price fall? The market had already priced in "better-than-expected" performance.

HP's stock price fell about 10% in after-hours trading following the earnings release, after closing at $30.52 in regular trading. Year-to-date, prior to the earnings report, the company's stock price had risen 37%.

This means that the market had already partially priced in the expectation that the July quarter would be better than feared before the earnings report. Morgan Stanley analysts pointed out before the earnings report that investors had already expected HP's quarterly performance to be "better than previously feared," and the real focus had shifted to whether the trends in the PC and printer markets were deteriorating.

JPMorgan analysts also believe that shareholders may find it difficult to feel truly at ease until HP provides its outlook for the next fiscal year. While the current earnings report presents a higher profit forecast, it has not alleviated market concerns about demand, costs, and price elasticity next year.

The core contradiction: improved profit guidance, but doubts about the quality of demand.

The key to HP's financial report is not whether there was growth, but the quality of that growth.

On the one hand, the company achieved double-digit revenue growth, with PC revenue increasing significantly and full-year profit guidance exceeding expectations; on the other hand, PC shipments declined significantly, profits were boosted by tariff refunds, and the printing business remained sluggish.

For hardware companies, price increases can improve revenue and profits in the short term, but if sales continue to decline, the market will worry that price increases are mortgaging future demand. HP is currently facing this very problem: cost pressures are driving up prices, but prices may in turn suppress demand.

Ahead of the release of guidance for the next fiscal year, investors will focus on three key areas regarding HP: whether PC shipments can stabilize, whether memory cost pressures can be eased, and whether core profitability can be maintained after tariff refunds subside.

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