HP vs Dell: Is Any Business a Good Investment Through 2023? (NYSE:DELL) – Looking for Alpha | Hot Mobile Press

Alistair Berg

HP Inc. (NYSE:HPQ) and Dell Technologies, Inc. (NYSE: Dell) are two of the best-known and most successful computer manufacturers in the world. HP started out in 1939 as Hewlett Packard in a garage in Palo Alto and Dell was famously founded in 1984 by a college student, Michael Dell, at the University of Texas.

Now they are two of the largest PC makers in the world with combined annual sales exceeding $170 million. HP also makes a variety of printers, of course, while Dell expanded into cloud services with its 2015 acquisition of EMC.

Looking at their 5-year revenue trends, both have increased their revenue, but DELL’s 42% increase was greater than HP’s 29%.

diagram

Alpha wanted

Year-to-date, both stocks have fallen significantly, DELL down 24% and HP around 15%.

But since Dell went public in 2018, DELL’s price has significantly outperformed HP’s price by 109% to 71%.

diagram

Alpha wanted

In this article, I will compare the current status of both companies and make an investment recommendation for both.

financial figures

When looking at key financial metrics, it’s interesting to see how close the two companies are on many of the key metrics.

For example, notice that Gross Margin (line 5) and Market Value (line 6) are virtually identical, meaning both have excellent margins but appear to be undervalued. Other benchmarks that are very close in value are the PE Ratio (line 11) and the Free Cash Flow Price (line 16).

The only thing that stands out to me is the gross margin to enterprise value (line 8), where Dell’s is a whopping 70%. That could indicate that either DELL is too expensive or HP is too expensive, although all other ratios are very close.

But both have roughly the same gross margin percentage (line 5), so there’s no direct benefit there.

diagram

I am looking for alpha and author

But if we look at the historical price-to-sales ratio, we can see that Dell currently appears undervalued compared to historical values.

diagram

Alpha wanted

All in all, the metrics are surprisingly similar, although Dell may be slightly undervalued compared to HP.

Analyst ratings are higher for Dell than HP

If we look at Seeking Alpha plus Wall Street analysts together, we can see that DELL is more highly recommended than HP with 14 buys and no sells compared to HP’s almost equal 6 buys and 5 sells.

Additionally, HP’s 15 holds show some analyst hesitancy.

diagram

I am looking for alpha and author

Quants don’t seem to think either is a buy at this point, with HP rated at a slightly higher hold than Dell. No enthusiasm from quants either.

diagram

I am looking for alpha and author

HP didn’t do well in the last recession

If, like me, you’re concerned about a looming recession in the next year or 18 months, knowing how a company fared in the last recession can provide insight into investing.

December 2007 through June 2009 was the last recognized recession and HP underperformed at almost 25%. As Dell went public for the second time in 2018, data for the previous period is not available, although Dell was public at the time.

diagram

Alpha wanted

However, we are having a recession-like time during COVID-19 that we can use as a comparison. In this particular case, we can see that Dell has done much better over this period with an increase of over 130%.

diagram

Alpha wanted

Both companies are concerned about the slowdown in business prospects

PC sales are the largest source of revenue for both companies, and right now things aren’t looking good for the next year or so.

Here are the latest numbers from Gartner, and they’re not pretty.

Global PC shipments totaled 72 million units in the second quarter of 2022, down 12.6% from the second quarter of 2021, according to preliminary results from Gartner, Inc. The sharpest decline in nine years for the global PC market by geopolitical, economic and supply chain challenges impacting all regional markets. Source: gardener

The downturn is even clearer in this chart from Gartner:

diagram

Gartner Group

Note shipments are generally down, with the exception of Apple, whose volumes are up slightly due to the recent release of the Mac M1.

With the possibility of a recession, inflation, and the huge surge in unit count during COVID-19 and the Zoom revolution, I’m having a hard time seeing unit count increase at least over the next 18 months.

The problem can be easily seen by looking at the unit growth numbers from 2020 to 2021 below.

diagram

I.D.C

These numbers certainly look different from the 2021 to 2022 comparisons we’ve seen from Gartner.

In HP’s case, printer revenue is already down year over year.

diagram

hp

Conclusion:

In the long-term, the future looks bright for both companies as their markets will eventually revolve just as they did post-COVID. Both companies are profitable, have relatively little debt, and are among the top three PC companies in the world, behind Lenovo.

But as the negative unit trends above show, the market could be extremely difficult over the next year or 18 months and maybe even beyond.

The obvious investment question is whether now is the time to buy either of these companies. Both have fallen over the past 6-8 months amid ongoing logistics and market issues.

But since we are only looking to 2023, we can assume that these problems will not be fully resolved by then.

Of course, HP also has the printer business and Dell has expanded aggressively into the cloud market, but both areas are very competitive.

As the financials section above shows, there isn’t much of a difference between the two companies, although Dell may be slightly undervalued compared to HP. But both have to contend with issues, the biggest of which may just be negative market sentiment toward hardware vendors in general.

HP has a much more substantial dividend and has increased it every year since 2017.

By the end of 2023, I see both companies facing headwinds on the earnings side, but also potentially poor overall stock market performance and a large dose of negative sentiment.

Until results improve and the market sentiment towards them becomes more positive, HP is both a sell and Dell is a hold.

Leave a Comment