We recently published a list of the 8 Best AI PC Stocks to Buy Now. Since HP Inc (NYSE:HPQ) ranks 7th on the list, it deserves a deeper look.
When the AI revolution began with the launch of ChatGPT, no one would have thought that down the road it would bring a huge growth catalyst for the PC industry, notorious for its cyclical nature and unpredictability. Fast forward to today, everyone is talking about PCs equipped with AI-focused equipment capable to process generative AI workloads. But in just a matter of few months why did the market feel the need for AI PCs? It all boils down to costs. GPT-4 costs $0.03 per 1,000 tokens for prompts and $0.06 for completion according to Microsoft’s estimates. Consider millions of users prompting LLMs from their phones and computers. The costs of scaling such systems are not feasible. That’s why the market thought allowing users to process AI-intensive workloads natively instead of using the Cloud is the future. And that caused the AI PC boom. Tech market analyst firm Canalys says AI PC shipments are expected to soar to 170 million in 2027, from 25 million in 2022. That would be a 60% share of the total PC market. The firm also expects AI PC shipments to double from 2023 to 2024 and double gain from 2024 to 2025.
Canalys also expects vendors to ship 205 million AI-capable PCs in 2028, representing a CAGR of 44% from 2024 through 2028.
For this article we scanned Insider Monkey’s database of 919 hedge funds and picked 8 AI PC stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7. HP Inc (NYSE:HPQ)
Number of Hedge Fund Investors: 46
Microsoft has named HP Inc (NYSE:HPQ) as one of its notable partners in the production of AI PCs. HP Inc (NYSE:HPQ) is also making waves in the AI PC market with HP Inc’s (NYSE:HPQ) OmniBook X AI PC and HP Inc (NYSE:HPQ) EliteBook Ultra G1q AI PCs. HP Inc (NYSE:HPQ) recently posted strong Q2 results, which also indicated HP Inc (NYSE:HPQ) has started to see a new AI-powered PC refresh cycle. Morgan Stanley analyst Erik Woodring said in a note that HP Inc’s (NYSE:HPQ) PC business saw growth for the first time since April 22. The analyst also maintained his Overweight rating and increased the stock’s price target to $37 from $36.
HP Inc (NYSE:HPQ) shares have gained about 18% so far this year. HP Inc (NYSE:HPQ) is also a dividend-paying company, with a 3% dividend yield as of June 4 market close. HP Inc (NYSE:HPQ) shares are trading at 9.53X HP Inc’s (NYSE:HPQ) 2025 estimated earnings per share, which makes the stock undervalued given the industry’s forward P/E median sits at 22. According to data from Yahoo Finance, HP Inc (NYSE:HPQ) earnings are expected to grow at 6.70% next year and at 5.10% for the following five years on a per-annum basis.
As of the end of the first quarter of 2024, 46 hedge funds tracked by Insider Monkey reported owning stakes in HP Inc (NYSE:HPQ). Cliff Asness’s AQR Capital Management owns a $257 million stake in HP Inc (NYSE:HPQ).
Greenlight Capital stated the following regarding HP Inc. (NYSE:HPQ) in its first quarter 2024 investor letter:
“The title of our Sohn presentation was “Solve AI,” which was a play on Solvay’s corporate name. Nonetheless, we established another new long position that actually stands to benefit from AI, which we believe is not reflected in the current stock price. HP Inc. (NYSE:HPQ) sells computers, printers and adjacent products and supplies. We established an initial position at an average price of $30.76 per share, which is about 9x current year earnings estimates. Recent results reflect a two-and-a-half-year cyclical downturn in demand for computers, which followed a mini-boom driven by COVID and related demand for equipment to work-from-home. We believe that we are, at a minimum, on the cusp of a normal PC refresh cycle, which should drive earnings above estimates. HPQ has committed to return 100% of free cash flow to shareholders through buybacks and dividends. The shares have a 3.6% dividend yield and we estimate HPQ has the capacity to buy back 25-30% of the outstanding shares over the next three years.
The more exciting opportunity is through a possible AI-driven PC adoption cycle, fueling higher unit prices and a more robust PC market recovery. Currently, investor attention around AI is focused on cloud service providers and related equipment. This summer, Intel plans to release a neural processing unit (NPU), which will allow AI functionality on local devices. Microsoft has teased AI features that are coming in the next Windows update later this year, which may require a computer with an NPU to fully function. One such application is believed to be ‘AI Explorer,’ which is described as an “advanced Copilot” with a built-in history/timeline feature that turns everything you do on your computer into a searchable repository using natural language. It is said to work across any application and allows users to search for previously opened conversations, documents, web pages and images. While we have spoken with experts that are divided between being enthusiastic and skeptical of an AI PC cycle, we don’t believe any of the optimism is currently reflected in the share price. HPQ ended the quarter at $30.22 per share.”
Overall, HP Inc (NYSE:HPQ) ranks 7th on Insider Monkey’s list titled 8 Best AI PC Stocks to Buy Now. While we acknowledge the potential of HP Inc (NYSE:HPQ), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HP Inc (NYSE:HPQ) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
