HP Q1 Beat Masks Persistent Margin Risks Amid Memory Inflation

What happened

HP Inc. reported Q1 FY2026 results that exceeded expectations, with adjusted EPS and net revenues beating estimates driven by an 11% year-over-year surge in Personal Systems revenue, partially offsetting a 2% decline in Printing. However, this positive headline masks deeper structural challenges, as SEC filings reveal ongoing margin pressure from DRAM/NAND inflation, tariffs, and a declining Print supplies annuity. The Seeking Alpha article frames this as a market opportunity due to short-term focus, but the DeepValue report cautions that the real test will be HP's ability to pass through cost increases without triggering demand destruction in the second half of FY2026. HP reaffirmed robust free cash flow guidance of $2.4 billion, supporting continued buybacks and dividends, yet this relies on successful execution of the FY2026 restructuring plan targeting ~$300 million in savings. Investors should remain wary, as the stock's current valuation at low multiples reflects these unresolved risks, with upcoming quarters critical for validating management's mitigation strategies under interim leadership.

Implication

The Q1 earnings beat provides temporary relief but doesn't address the core swing factor: HP's ability to preserve Personal Systems ASPs as memory costs rise in H2 FY2026, a risk highlighted in filings where pricing actions have not fully offset commodity and tariff impacts. Free cash flow guidance supports dividends and buybacks, yet this depends on maintaining credit ratings and avoiding further margin erosion, with the balance sheet showing meaningful leverage at $9.7 billion debt. The 2% decline in Printing underscores ongoing structural challenges, with supplies revenue declining due to installed base contraction, weakening the high-margin annuity that historically cushioned PC cyclicality. Management's restructuring efforts must deliver the promised ~$300 million in FY2026 savings to offset cost headwinds, a milestone that remains unproven and is critical for earnings durability. Given the stock's low multiples, any failure in cost pass-through or restructuring execution could drive downside towards the bear case of $18, while success might only support a re-rate to the base case of $21, offering limited upside without clear margin improvement.

Thesis delta

The Q1 results align with the DeepValue report's base scenario, demonstrating that HP can exceed near-term expectations despite macro headwinds. However, this does not alter the key investment thesis, which hinges on observable proof of margin preservation and cost savings over the next 6-9 months, as memory inflation impacts are expected to intensify in H2 FY2026. Investors should maintain a 'WAIT' stance, as the news reinforces the need for patience until evidence from pricing actions and restructuring delivery materializes.