Q4 EPS $0.93 Above Midpoint of $0.87-$0.97 Guide; FY25 EPS $3.10 in Line With Revised Guide; But FY26 Outlook Worsens Materially: EPS Guide $2.90-$3.20 (Essentially Flat to Down vs FY25's $3.10) Absorbs $0.30 Net Memory Cost Headwind in H2 FY26; PS Operating Margin Guided Below 5-7% Long-Term Range for Full Year; New $1B AI-Driven Cost Program Over 3 Years With 4,000-6,000 Workforce Reductions; Memory Now 15-18% of PC Bill of Materials Rising Sharply; Investor Day April 23, 2026; Dividend Raised 13% to $0.30 — 10th Consecutive Annual Increase — Downgrading to Underperform From Hold

Coverage Update from Q3 FY25

Three months ago at the Q3 print, we maintained Hold at ~$26 with $26-$32 fair value range. Our framework: Q3 PS margin recovery validated, AIPC ahead of plan, Future-Ready savings on track, Q4 trajectory implied FY25 EPS at high end of guide. We modeled FY26 EPS recovery to $3.35-$3.55 on tariff normalization + AIPC trajectory + continued savings.

The Q4 print + FY26 guide materially challenges the prior framework:

• FY25 EPS landed at $3.10 (lower end of revised $3.00-$3.30 range, not high end as Q3 implied)
• FY26 EPS guide $2.90-$3.20 — $0.15-$0.45 below our prior FY26 model midpoint of $3.45
• Memory cost inflation — new structural headwind not present at Q3 print
• $1B AI restructuring with 4-6K layoffs — magnitude signals structural challenge requiring extraordinary measures
• PS margin guided below 5-7% range for FY26 — multi-quarter operational compression

The combination of (a) materially weaker FY26 outlook + (b) memory cost as new structural headwind + (c) magnitude of the announced restructuring justifies downgrading to Underperform. The stock's dividend yield + capital return + AIPC tailwind provide a floor but the FY26 earnings trajectory does not support the prior fair value range.

Results vs. Consensus — Q4 / FY 2025

Q4 Scorecard

FY25 Full Year vs. Initial Guidance

FY26 Guide vs. Prior Framework

Quality-of-Print Callout

Segment Performance — FY25 Full Year + Q4

Personal Systems (FY25 revenue +6%, Q4 +8% / FY25 PS margin lower half of 5-7%)

Personal Systems delivered strong Q4 with revenue +8% YoY on 7% unit growth + increased ASPs. PS commercial revenue and units +7% on Win 11 refresh + AIPC adoption momentum. Consumer revenue +10% on 8% unit growth with strong holiday performance + share gains in consumer premium. PS operating margin 5.8% in Q4 (solidly in 5-7% range) — tariff mitigation fully effective; pricing actions + supply chain flexibility supporting margin.

For FY25, PS revenue +6% with margin in lower half of 5-7% range (tariff drag carried through year). AIPC penetration accelerating — >30% of shipments in Q4 (doubled revenue YoY). With 40% of installed base still on Windows 10 at end of Q4 (and Windows 10 EoL passed in October 2025), Win 11 refresh tailwind continues into FY26. Advanced compute solutions delivered double-digit growth driven by data science workstations.

However, the FY26 PS margin outlook is meaningfully more cautious: PS operating margin guided BELOW 5-7% long-term range for the full year — driven by the memory cost inflation that doubles sequentially Q4 to Q1 with continuing escalation through H1.

Assessment: PS is structurally strong on the demand side (AIPC + Win 11 + commercial premium) but structurally challenged on the cost side (memory inflation, residual tariff). The Q4 operational print is positive but the FY26 margin compression is the binding constraint. We model FY26 PS margin at 4.5-5% midpoint (vs. 5.8% Q4 actual) — meaningfully below long-term range.

Print (FY25 revenue -4%, Q4 -4% / FY25 Print margin top of 16-19%)

Print revenue declined 4% in Q4 reflecting market softness and delayed purchasing decisions. Print units declined YoY but improved sequentially. HP maintained #1 share in print. Supplies revenue performed as expected.

Key growth areas continued strong performance: Consumer subscriptions delivered double-digit revenue growth and is just under $1B in annual revenue. Industrial graphics exceeded $1.8B annual revenue with ninth consecutive quarter of YoY growth. 3D printing double-digit growth. Workforce solutions double-digit growth with 10 new customers from world's 200 largest companies.

Print operating margin 18.9% in Q4 (at top of 16-19% range) and FY25 finish near top of range. For FY26: Print operating margin guidance maintained at upper half of 16-19% range — structural cash flow contribution continues.

Assessment: Print continues to deliver as a structurally declining cash cow with strong margin discipline. The mix shift toward higher-margin recurring revenue (consumer subscriptions, industrial graphics, workforce solutions) is the right strategic direction. We expect FY26 Print revenue -3 to -4% and margin near top of range at 18-18.5%.

FY26 Guidance Framework

Key Topics & Management Commentary

Overall Management Tone: Confident on FY25 delivery; cautious and prudent on FY26 outlook. The CEO is explicit that memory cost inflation is the binding concern with mitigation taking multiple quarters to fully implement. The $1B AI restructuring announcement signals management's acknowledgment that the cost structure needs material change to navigate the memory cycle. The Investor Day in April 2026 will be the next forum for detailed framework articulation.

1. Memory Cost Inflation — The Binding Constraint

"Memory costs are currently 15% to 18% of the cost of a typical PC. And while an increase was expected, its rate has accelerated in the last few weeks. Our portfolio is less sensitive to the commodities market than it was during the last memory cycle. Over a third of the peers' gross profit comes from services and peripherals. We expect to mitigate the impact of these cost headwinds in the first half of our fiscal year with our inventory on hand and a set of actions across our portfolio and basket of commodities. For the second half of the year, we expect Personal Systems margins to be impacted."
— Enrique Lores, CEO

Memory cost is the binding constraint for FY26. Currently 15-18% of PC bill of materials with rate accelerating sharply in recent weeks. Management's mitigation framework: (a) long-term supplier agreements + strategic inventory positions, (b) qualifying lower-cost suppliers with faster qualification cycle, (c) portfolio redesign for reduced memory configurations, (d) AI-enabled internal transformation accelerating, (e) pricing increases in partnership with channel + direct customers.

The net $0.30 EPS impact from memory (H2 FY26 weighted) reflects mitigation actions partially offsetting the cost pressure. PS operating margin guided below 5-7% range for the full year — H1 in 5-6%, H2 worse.

Assessment: Memory inflation is a real, multi-quarter structural headwind. HP's mitigation framework is operationally credible but multi-quarter. The risk is that memory costs continue escalating beyond H2 FY26 expectations, which would require additional mitigation and could pressure FY27 EPS as well. We model FY27 PS margin recovery only if memory normalizes — a meaningful unknown.

2. The New $1B AI Cost Program With 4,000-6,000 Layoffs

"And as we look ahead, we see a significant opportunity to embed AI into HP, to accelerate product innovation, improve customer satisfaction, and boost productivity. We have launched a company-wide program led by an executive reporting directly to me, and we have a line of sight to drive approximately $1 billion of gross run rate savings over three years across product development, customer service and support, and many of our operational processes. These will result in workforce reductions of 4,000 to 6,000 people over the next years. These are some of the most difficult decisions we need to make, and we are committed to treating our colleagues with care and respect."
— Enrique Lores, CEO

The new AI cost program is a structural restructuring announcement. ~$1B gross run-rate savings over 3 years; ~$300M expected to land in FY26 (initial year). Workforce reductions of 4,000-6,000 over the program (~6-8% of total workforce — HP has approximately 75-80K employees). Restructuring charges $650M total over the 3-year program (~$250M FY26 cash cost).

The magnitude is meaningful. This is incremental to the just-completed $2.2B Future-Ready program and signals management's view that additional structural cost reduction is necessary given the multi-year operational pressures (memory inflation, mature PC market, Print decline, AI-driven productivity opportunities).

Assessment: The $1B AI program is operationally appropriate but signals structural acknowledgment that normal operating discipline cannot absorb the memory cycle. The savings come over 3 years; the disruption (layoffs, restructuring charges) is more concentrated in FY26. The combination of these two facts is structurally bearish — the company needs extraordinary cost reduction to maintain even flat EPS.

3. AIPC Penetration Now >30% of Mix — Continued Acceleration

"With 40% of the installed base still on Windows 10 at the end of Q4, the Windows 11 refresh will remain a tailwind for the PC market into 2026. And demand for AIPCs continues to accelerate, now representing more than 30% of our shipments this quarter."
— Enrique Lores, CEO

AIPC mix >30% in Q4, up from >25% in Q3, with revenue doubled YoY. The secular trajectory continues — Windows 10 installed base still 40% at end-Q4 with EoL passed in October 2025 supports continued Win 11 refresh activity into FY26. ISV ecosystem expanding with Microsoft + silicon partner collaboration.

The AIPC + Win 11 combination supports continued PS revenue growth — but it does not offset memory cost inflation. The revenue trajectory is positive; the margin compression is the binding constraint.

Assessment: AIPC is the strongest secular tailwind for HP. The penetration ahead of plan supports continued PS revenue + ASP gains. However, the AIPC growth doesn't materially change the FY26 margin compression story.

4. FY26 EPS Guide $2.90-$3.20 — Structural Step-Back

"With all of this, and including an estimated 30¢ impact from projected memory cost increases net of mitigations, we expect FY 2026 non-GAAP diluted net earnings per share to be in the range of $2.9 to $3.2 and FY 2026 GAAP diluted net earnings per share to be in the range of $2.47 to $2.77."
— Karen Parkhill, CFO

FY26 EPS guide $2.90-$3.20 ($3.05 midpoint) — essentially flat to down on FY25's $3.10. The $0.30 net memory impact (after mitigations) is the binding swing factor. PS margin below 5-7% range for full year. Print margin upper half of 16-19% range. The guide assumes continued AIPC + Win 11 momentum.

This is a multi-year framework reset. The prior expectation of mid-single-digit EPS growth in FY26 from continued operational improvement is no longer the framework. The new framework: flat-to-modestly-down FY26 EPS with FY27 recovery contingent on memory normalization.

Assessment: The FY26 EPS guide is structurally weaker than the prior Hold framework anticipated. The $0.40 midpoint cut from our prior model ($3.45) is meaningful. We model FY26 EPS at $2.95-$3.10 ($3.00 midpoint, lower end of guide) given the memory uncertainty.

5. Q1 FY26 Guide $0.73-$0.81 — Front-Loaded EPS Compression

"For Q1, expect non-GAAP diluted net earnings per share to be in the range of $0.73 to $0.81 and first quarter GAAP diluted net earnings per share to be in the range of $0.58 to $0.66."
— Karen Parkhill, CFO

Q1 FY26 EPS guide $0.73-$0.81 ($0.77 midpoint) — down from Q1 FY25's $0.74 (essentially flat) but reflecting the early-cycle memory cost pressure. Q1 typically lower given timing of incentive comp payments + seasonal patterns. Sequential decline from Q4 FY25's $0.93 is significant.

The Q1 framework implies FY26 EPS landing closer to mid-point of $3.05 vs. high-end of $3.20 — the early-year compression makes back-half recovery essential to hit the higher end.

Assessment: The Q1 FY26 framework supports the lower end of FY26 guide. Memory cost pressure front-loaded with limited mitigation traction in Q1.

6. Investor Day April 23, 2026 — Framework Articulation

"We are planning to hold our Investor Day on April 23, where we will share the full plan on how AI is transforming HP. We remain confident in our ability to lead the future of work through technology."
— Enrique Lores, CEO

Investor Day confirmed for April 23, 2026. Key topics will likely include: (a) detailed AI cost program framework + targets, (b) FY27 + FY28 EPS trajectory expectations, (c) capital return framework with memory cycle assumed, (d) Print transformation + recurring revenue framework, (e) competitive positioning vs. Dell, Lenovo, Apple.

Assessment: The Investor Day is the next major catalyst. The April 23, 2026 date is well-positioned to allow Q1 FY26 results to inform the framework presentation. The risk: if the framework presented is less ambitious than the market expects, the stock faces additional pressure.

7. Dividend Raised 13% to $0.30/Quarter — 10th Consecutive Annual Increase

"Lastly, we are pleased to announce today that we are raising our quarterly dividend to $0.30 per share. This is the tenth consecutive annual increase since our separation in 2015 and reflects the confidence we and our board have in our long-term outlook ahead."
— Karen Parkhill, CFO

Dividend raised 13% to $0.30/quarter (from $0.2756 prior). 10th consecutive annual increase since the 2015 HP / HPE separation. The dividend trajectory has been remarkably consistent — supports the capital return discipline thesis.

At ~$26 stock price with $0.30/quarter dividend (~$1.20 annualized), the dividend yield is ~4.6% — meaningful support for the stock floor.

Assessment: The dividend is the strongest support to the stock floor. We don't expect the dividend to be at risk given the FCF generation profile + the management commitment. However, the dividend yield alone doesn't justify owning HPQ if EPS is structurally compressed.

8. Q4 Capital Return Acceleration — $800M Returned

"In Q4, we returned close to $800 million to shareholders through both dividends and share repurchase, and returned more than $1.9 billion for the fiscal year. While we finished the quarter slightly above our target leverage ratio, we increased our cash balances, reserving sufficient funds to pay down 2026 debt maturities, which enabled us to buy back shares in the quarter."
— Karen Parkhill, CFO

Q4 capital return $800M reflects buyback resumption — leverage normalized sufficiently to allow active buyback beyond stock comp dilution offset. FY25 total capital return $1.9B (~65% of FCF) — below the 100% target but reflects the temporary leverage constraint through H1 FY25.

Forward outlook: cash balances increased to support 2026 debt maturities. If leverage continues to normalize, buyback pace could accelerate in FY26.

Assessment: Capital return discipline is operationally strong. The buyback can accelerate in FY26 if leverage permits, providing share count reduction tailwind. However, the FY26 EPS compression is the more meaningful negative factor.

9. Future-Ready Program — Delivered $2.2B vs. Original $1.4B Target

"We surpassed our original $1.4 billion savings target, ultimately delivering $2.2 billion in cumulative gross annualized savings. And on $1.2 billion of restructuring spend, we delivered a savings to charge ratio of almost 1.8 times, well above our initially projected ratio of 1.4 times."
— Karen Parkhill, CFO

The completed Future-Ready program delivered $2.2B cumulative gross annualized savings (well above original $1.4B target and exceeding the $2B+ raised target). Restructuring spend $1.2B; savings-to-charge ratio 1.8x (above initial 1.4x).

The completion of Future-Ready transitions to the new $1B AI cost program — different focus areas (AI-driven automation, product development, customer service) but similar multi-year structural framework.

Assessment: Future-Ready delivery is strong operationally. The new $1B AI program is the structural successor — multi-year framework with explicit AI-driven savings as the lever.

10. Print Long-Term Framework — Outperform Market via Big Tank + Subscriptions + Industrial

"Second, in print, we expect to grow slightly faster than industry projections of low single-digit market decline. We intend to take share by doubling down on big tanks. We are increasing our marketing investments, driving new product and solution introductions, and expanding globally our successful all-in subscription offering."
— Enrique Lores, CEO

Print FY26 framework: outperform low-single-digit market decline via Big Tank + Consumer Subscriptions + Industrial graphics + Office share gains. Mix shift toward higher-margin recurring revenue continues. Operating margin in upper half of 16-19% range — durable cash flow contribution.

Assessment: Print continues as the structural cash cow. We expect Print revenue -3 to -4% in FY26 with margin holding 17-18%. The structural cash flow supports capital return + AIPC investment.

11. Recurring Revenue Strategic Emphasis

"Across both print and personal systems, we have a relatively small but growing base of services, subscriptions, software, and products as a service that are contractual in nature. And as we look to the future, we intend to drive greater growth in this important base of higher-margin, more stable recurring revenue. So expect us to highlight this even more for you as we continue to focus on strengthening our company and increasing the value we offer to our investors."
— Karen Parkhill, CFO

The CFO is signaling that recurring revenue (services, subscriptions, software, PaaS) will be highlighted more prominently in future communications. This includes consumer subscriptions (~$1B annual run-rate in Print), workforce solutions, services, and the workforce experience platform.

The recurring revenue base is structurally higher-margin and provides revenue durability against the cyclical hardware businesses. If management can scale the recurring revenue base meaningfully, it would improve the long-term valuation framework.

Assessment: The recurring revenue emphasis is the right strategic direction. However, it's a multi-year build — the FY26 contribution won't materially offset the memory cycle compression. We watch for Investor Day disclosures on specific recurring revenue framework and targets.

Analyst Q&A Highlights

Memory Cost Mitigation Levers and Price Elasticity

Lead analyst question on the multi-faceted memory mitigation strategy and pricing elasticity. Management walked through scale-based supplier relationships, portfolio breadth allowing customer configuration recommendations, demand-shaping via workforce experience platform telemetry, and selective pricing actions.

Q: "Like, we've seen plenty of memory cycles in the past. This one, you know, is fairly unprecedented in rate and pace of change. I'm just wondering, as you think about the various strategies you're going to deploy to navigate this, how do you think about price elasticity in a somewhat weaker consumer market? How do you think about despeccing and any other sort of strategies that HP could deploy in terms of being able to raise price without sort of impacting the demand elasticity?"
— Wamsi Mohan, Bank of America

A: "As you said, this is not the first time we go through a situation like that. So the team has plenty of experience handling these situations. I think the first thing that helps us in this situation is our scale. And by using our scale, we have today a good supply position, thanks to the long-term agreements and the relationships we have with many suppliers. … We also can use the breadth of our portfolio to make sure that customers get the right configuration and to de-scale in those cases where it's possible to balance company profitability with experience from customers. Something unique that we have this time is something that I have been mentioning before, which is the workforce experience platform."
— Enrique Lores, CEO

Assessment: The mitigation framework is operationally credible but the unprecedented rate of memory cost increase creates real uncertainty. We expect mitigation to partially offset the cost pressure but the residual hit is the $0.30 net EPS impact.

FY26 FCF Trajectory Despite EPS Pressure

Question on FY26 FCF maintaining at $2.8-$3.0B despite the EPS compression. CFO confirmed working capital improvements offset earnings pressure.

Q: "Your free cash flow guide for next year is flat year on year despite the margin pressures you alluded to from increased memory pricing. What are some of the elements offsetting these headwinds in cash flows?"
— Wamsi Mohan, Bank of America

A: "Like we're doing with our earnings guide, we're taking a prudent approach to our expectations there, particularly the recently projected increase in memory cost. So at this point, we expect our free cash flow to be relatively flat, as you said, with slightly lower earnings, and that's offset by improvements in working capital, primarily due to the favorable cash conversion cycle we have with the expectation of our growing PS business. We also expect CapEx and restructuring costs to be down slightly year over year."
— Karen Parkhill, CFO

Assessment: FCF holding flat YoY is structurally important — supports continued capital return discipline even with EPS pressure.

Memory Cost Magnitude and Pricing Approach

Question on price increase approach. Management confirmed case-by-case, category-by-category, country-by-country approach with selective rather than uniform increases.

Q: "Just on the topic of higher memory prices, you talked about a number of actions you could take. Staying on the topic of pricing, now would you consider price increases across the entire portfolio, or would you consider them more tactical in nature?"
— Brian Luke (for David Vogt), UBS

A: "I would say we are gonna be looking at it case by case, country by country, category by category. But the impact on memory cost is significant. I would say it's gonna happen across the board, but more selectively or higher or lower depending on the specific situation."
— Enrique Lores, CEO

Assessment: Selective pricing is appropriate given the demand elasticity dynamics. The combination of pricing + portfolio + supply + cost actions provides multi-faceted mitigation.

AI Cost Program Scope and Implementation

Question on the AI cost program — composition of $1B savings, areas of focus, implementation timeline. Management framed product development, customer service, operational processes as the three focus areas with executive-level governance.

Q: "On the $1B AI cost program — can you walk through the composition of savings, the implementation timeline, and the workforce impact specifics?"
— Various analysts (paraphrased)

A: "We have a line of sight to drive approximately $1 billion of gross run rate savings over three years across product development, customer service and support, and many of our operational processes. These will result in workforce reductions of 4,000 to 6,000 people over the next years. … We estimate associated restructuring charges of around $650 million over the three-year period, which include roughly $250 million in charges to be incurred in FY 2026. We continue to identify additional opportunities as part of this initiative, and we'll share those with you at our upcoming Investor Day."
— Karen Parkhill, CFO

Assessment: The $1B AI program framework is structured but the workforce impact (4-6K layoffs) signals meaningful disruption. Execution risk is real — Investor Day will provide framework detail.

Investor Day Framework and FY27-FY28 Outlook

Question on Investor Day topics and FY27-FY28 framework. Management deferred specific detail to the April 23, 2026 event.

Q: "Can you preview what we should expect at the Investor Day in April? What framework articulation is on the agenda?"
— Various analysts (paraphrased)

A: "We are planning to hold our Investor Day on April 23, where we will share the full plan on how AI is transforming HP. … We continue to identify additional opportunities as part of this initiative, and we'll share those with you at our upcoming Investor Day."
— Enrique Lores, CEO; Karen Parkhill, CFO

Assessment: Investor Day will be the next major framework catalyst. We expect detailed FY27-FY28 outlook and specific AI cost framework articulation.

What They're NOT Saying

1. Specific FY27/FY28 EPS framework. Deferred to Investor Day April 23, 2026.
2. Detailed memory cost trajectory by quarter. Qualitative "H2 weighted" framing without quarterly granularity.
3. Specific AI cost savings by department or function. Three focus areas mentioned but no detailed breakdown.
4. Geographic distribution of 4-6K layoffs. Total impact disclosed; geographic mix not detailed.
5. Workforce experience platform revenue or run-rate. Mentioned 48M endpoints + 12M IT issues remediated monthly but no revenue disclosure.
6. Recurring revenue specific size or growth rate. Strategic emphasis articulated; specific quantification deferred.
7. Specific consumer subscription milestones. <$1B annual mentioned for Print subscriptions but no PS subscription breakdown.
8. Specific FY26 buyback cadence beyond capital return framework. 100% FCF target with leverage threshold; no specific quarterly pace.
9. Memory cost normalization timeline beyond FY26-FY27 expectation. "Likely into fiscal '27" framing without specific trajectory.

Market Reaction

• Pre-print setup: HPQ closed Nov 25, 2025 at ~$26. YTD ~-25%; trailing 30-day +2%; trailing 12-month -10%.
• After-hours / next-session move: Stock indicated -10 to -15% AH on the FY26 EPS guide reset + memory cost framework + restructuring announcement.
• Volume: Pre-market volume elevated to ~5x average — heavy volume reflecting the magnitude of the FY26 reset.
• Peers: Dell down ~5% on PC market read-across. Lenovo (HK) down ~3-4%. Memory suppliers (Micron, SK Hynix, Samsung) holding on cycle expectations.

Interpretive read: The market is processing the FY26 reset as a structural negative — meaningfully weaker EPS outlook + memory cycle uncertainty + restructuring magnitude. We expect the stock to find support in the $22-$24 range on dividend yield (~5.5%) + FCF support. The downside path beyond $22 requires either further memory cost deterioration or AIPC adoption stalling.

Street Perspective

Debate 1: How Severe Is the Memory Cost Cycle Through FY26?

Bull view: Memory cycles are cyclical and historically self-correcting. HP has long-term supplier agreements, lower commodity exposure than prior cycles (services + peripherals contribute 1/3 of PS gross profit), and multiple mitigation levers (portfolio redesign, pricing, AI cost program). FY26 PSOP margin compression below 5-7% is temporary; FY27 recovery to within range.

Bear view: Memory cost trajectory has accelerated sharply with rate of increase unprecedented in pace. The $0.30 EPS hit could prove conservative if memory continues escalating. PS margin below long-term range for "the rest of the year" implies multi-quarter compression. FY27 recovery contingent on memory normalization that may not arrive on the expected timeline.

Our take: Memory cycle is multi-quarter and uncertain. We model PS margin recovery to 5-6% range in FY27 contingent on memory normalization in second half of CY26. Risk that memory cycle extends with FY27 EPS also pressured.

Debate 2: Does the $1B AI Cost Program Deliver Sustainable Savings?

Bull view: HP delivered $2.2B vs. $1.4B Future-Ready target — 1.6x over-delivery demonstrates restructuring execution capability. The $1B AI program has multi-year timeline (3 years) with diversified focus areas (product dev, customer service, operations). AI-driven automation is a real productivity lever.

Bear view: Restructuring program announcements often promise more than delivered. 4-6K layoffs (6-8% of workforce) over 3 years creates execution distractions + cultural disruption. $250M FY26 restructuring charge reduces capital available for buyback. The savings are gross run-rate, not net (mitigated by reinvestment).

Our take: We model ~$700-$800M net savings benefit by end of program (vs. $1B gross target). The savings contribute to FY27 + FY28 EPS recovery but don't materially help FY26.

Debate 3: Is the Dividend + Capital Return Floor Strong Enough?

Bull view: 10th consecutive annual dividend increase (now $0.30/quarter, ~$1.20 annualized, ~4.6-5% yield at $26) supports a strong floor. FY26 FCF $2.8-$3.0B supports continued ~100% capital return as leverage normalizes. Stock floor likely in $22-$24 range on yield support.

Bear view: Dividend yield support only floors the stock if FCF holds. If memory cycle worsens or AIPC trajectory stalls, FCF could compress and capital return discipline tested. The dividend's annual increase pace likely moderates with FY26 EPS reset.

Our take: The dividend floor is real at $22-$24 range. We don't expect the dividend to be at risk, but the yield alone doesn't justify owning HPQ when the FY26 earnings trajectory is impaired.

Model Implications & Thesis Scorecard

Model Update

• FY26 estimates (revised): Revenue $55.5B (+2%); non-GAAP EPS $2.95-$3.10 (lower end of $2.90-$3.20 guide); PS margin ~4.5% midpoint (below long-term range); Print margin ~18%; FCF $2.7-$2.9B
• FY27 estimates (contingent on memory normalization): Revenue $56.5B (+2%); non-GAAP EPS $3.10-$3.30 (memory recovery + AI savings); PS margin ~5.5%; Print margin ~17.5%; FCF $2.9-$3.1B
• FY28 estimates: Revenue $57.5B (+2%); non-GAAP EPS $3.40-$3.60 (full AI savings benefit); PS margin ~6%; Print margin ~17.5%
• Long-term framework: Low-single-digit revenue growth; PS margin 5-7% under normalized commodity environment; Print margin 16-19%; ~100% FCF return when leverage permits

Thesis Scorecard

Rating & Action

Downgrading to Underperform from Hold. Three drivers of the downgrade:

1. FY26 EPS is essentially flat to down vs FY25 — a multi-year framework reset. The $2.90-$3.20 guide ($3.05 midpoint) vs. FY25's $3.10 represents 0% to -3% EPS growth. The prior Hold rating was anchored on the expectation of mid-single-digit FY26 EPS growth from continued operational improvement. That expectation no longer holds.
2. Memory cost inflation is a new structural headwind. Net $0.30 EPS impact in H2 FY26 after mitigations; memory costs currently 15-18% of PC BOM and rising sharply. The multi-quarter compression of PS margin below 5-7% long-term range materially weakens the operational framework.
3. $1B AI cost program with 4-6K layoffs signals structural acknowledgment. The magnitude of the restructuring program is meaningful — incremental to the just-completed $2.2B Future-Ready program. The 6-8% workforce reduction is the cleanest signal that management views the operational environment as requiring extraordinary measures.

Fair value range moves to $20-$26 (from $26-$32). Stock at ~$26 pre-print; we expect 10-15% downside post-print on FY26 guide reset toward $22-$24. The fair value range reflects (a) FY26 EPS at $3.00 midpoint × 7x P/E (lower end of historical range during memory cycles); (b) dividend yield floor at ~5% (supporting $23-$24 floor); (c) capital return continuing to provide share count reduction tailwind.

What would reverse the downgrade (back to Hold or higher):

• Memory cost stability or decline in H1 FY26 — would materially improve FY26 EPS trajectory toward $3.20+ and support PS margin recovery
• FY26 EPS landing meaningfully above $3.20 — would demonstrate mitigation framework working better than expected
• AIPC trajectory reaching 40%+ ahead of plan — would support premium mix benefits offsetting memory pressure
• Investor Day delivering material AI cost savings framework above $1B — would support FY27-FY28 EPS recovery toward $3.50+
• Significant capital return reacceleration — buyback at $1B+/quarter pace would support share count reduction

Key watch items into Q1 FY26 (February 2026):

• Q1 FY26 results vs. $0.73-$0.81 EPS guide
• Memory cost trajectory — H1 weighted; any escalation or stabilization signals
• PS operating margin Q1 — below 5-7% range expected; magnitude of compression
• AIPC penetration continuing past 30%
• Capital return cadence — buyback acceleration as leverage normalizes
• FY26 guide range — any narrowing or shift
• Investor Day specific agenda detail (April 23 confirmed)
• Print margin holding 16-19% range
• Mitigation framework progress (supply, pricing, portfolio actions)