HP and Dell earnings offer clues on when PC woes may stop hurting our chip stocks

Published Wed, Nov 23 20222:28 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Quarterly earnings reports this week from HP Inc. (HPQ) and Dell Technologies (DELL) offer clues on when the struggling PC market may turn around — and a solid read-through to our chipmakers such as Advanced Micro Devices (AMD). HP Inc. HP makes computers — both laptops and desktops — that contain processors designed by AMD, Club holding Nvidia (NVDA), and Intel (INTC) The Club does not own Intel. HP on Tuesday night posted better-than-expected earnings per share and sales for its fiscal fourth quarter, which ended Oct. 31. But for our purposes, the company's 2023 guidance and commentary around inventory into next year is most important. HP expects PC unit sales to decline 10% year over year in fiscal 2023, which runs from November 2022 to November 2023. Its full-year adjusted EPS forecast between $3.20 to $3.60 came in below the $3.62 analysts expected. "Many of the recent challenges we have seen in FY 2022 will likely continue into FY 2023, including softer demand in both consumer and commercial and higher channel inventory levels across the industry," CFO Marie Myers said on Tuesday night's earnings call. We're not surprised by Myers' outlook. The potential sliver of good news, though, is HP's expectations around the cadence. Myers and HP's top boss, Enrique Lores, painted a picture of improving conditions in the second half of the fiscal year — on inventory levels, margins in the PC division, and overall revenue. "From an inventory perspective, we have been making progress reducing the inventory we see in the channel. Our expectation is that by the first half of the next fiscal year, we will back to our normal situation," Lores told CNBC's Jim Cramer in an interview. A slowdown in PC sales — particularly in consumer-focused models — has caused inventory levels to inflate. One way companies try to counteract that is by lowering prices, hoping that can partially offset the weaker demand despite the negative impact on margins. That's why HP expects margins in its PC segment to be toward the bottom of its 5% to 7% target range through at least the first two quarters of fiscal 2023. But as inventory levels normalize into the back half of the year, HP anticipates margin improvement. Dell Technologies Dell Technologies released its fiscal third-quarter results on Monday, reporting sales and earnings beats on conservative expectations, but issued a weaker-than-expected outlook amid weaker consumer demand for PCs. On the conference call, Dell struck a cautious tone on forward guidance and said it expects fourth-quarter revenue to be "down 16% at the midpoint," between $23 billion and $24 billion. While management didn't provide too many specifics about its expectations for fiscal 2024, it said many of the same overhangs this year — like slowing economic growth and rising interest rates — will persist. At the same time, it appears that the unfavorable supply chain disruptions are largely behind the company since it currently sees "standard lead times across its portfolio." Dell said it's in a place where "what we sell is what we ship in any given quarter." However, while inventory levels came down in the third quarter, the company said it will take "a few more quarters" to continue to normalize. That's our key takeaway with Dell. Before we get there, though, Dell continues to see weakness in the current quarter. CFO Thomas Sweet said on the call PC revenue is likely be down in the mid-20% range on a year-over-year basis. Dell's third quarter also offered further evidence of the divide within the PC market, with sales of commercial-focused machines holding up better than consumer ones. Dell saw "cautiousness" in consumer spending, which was reflected in a 17% year-over-year revenue drop in its client solutions group segment. Commercial revenue was down 13% to $10.7 billion, while consumer revenue fell 29% to $3 billion. Club take Our long-term thesis in both AMD and Nvidia has been predicated on secular tailwinds like cloud computing. But that hasn't insulated us from the pain caused this year by the slowdown in consumer end markets such as PCs and gaming after pandemic-fueled growth. Just as HP and Dell have been forced to respond with corrective actions such as price cuts, we've seen our chipmakers take similarly detrimental, but necessary, steps to respond to softer market conditions . While both chipmakers are diversifying their businesses in a way that deemphasizes PCs, the magnitude of the sales decline has been too great for the market to ignore. However, we've taken steps to right-size our chip positions, and we're now able to look into the future feeling comfortable with our exposure. What we heard about the PC market from Dell and HP is far from the worst-case scenario. While it's not incredibly bullish either, it is somewhat encouraging to hear management teams expect to see improvements within a few quarters. Remember, stocks are forward-looking assets. Investors will start buying up shares in anticipation of brighter days ahead. They don't wait until the sun is blinding them to step in. That's why stocks tend to bottom before the cyclical parts of their businesses do. Conversely, stocks tend to sell off when their industry is at a peak and can't get any better. That dynamic could help explain, at least partially, why AMD and Nvidia shares are outperforming the market Wednesday, rising roughly 1.3% each compared with the S & P 500 's more muted gain of 0.2%. We're taking what we heard from Dell and HP and including it in our thinking. But nevertheless, we remain a bit cautious on the sector overall right now, believing it's best to be patient before committing more capital. (Jim Cramer's Charitable Trust is long AMD and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A man passes a Hewlett Packard display at a technology conference

Jim Young | Reuters