HP Inc. (HP (HPQ)) shares took a hit on Thursday, and it's not hard to see why. The company just posted record quarterly revenue and raised its outlook, but investors are fixated on something else: the rising cost of memory and components that's squeezing the margins in its PC business. It's a classic case of good news being overshadowed by a looming concern.
Memory Inflation Is Coming for HP's Margins — Q4 Could Mark the Bottom
MarketDash
HP shares fall despite record Q3 revenue and raised guidance as investors worry about rising PC memory costs and shrinking margins.
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Record Revenue, Higher Outlook
Let's start with the numbers that should have made everyone happy. HP reported third-quarter revenue of $15.68 billion, up 12.5% year over year, beating the $14.34 billion estimate. Adjusted earnings came in at 83 cents per share, including an 11-cent benefit from tariff refunds, topping the 69-cent estimate.
Looking ahead, HP expects fourth-quarter adjusted earnings of 69 cents to 79 cents per share, above the 67-cent estimate, and GAAP earnings of 74 cents to 84 cents per share, compared with the 60-cent estimate. The company also raised its fiscal 2026 adjusted earnings forecast to $3.19 to $3.29 per share from $2.90 to $3.10, while analysts were expecting $3.04. GAAP earnings outlook was bumped to $2.52 to $2.62 per share from $2.15 to $2.45, and free cash flow forecast was raised to $3 billion to $3.2 billion.
Memory Costs Pressure PC Margins
But here's where the story gets complicated. During Wednesday's earnings call, investors zeroed in on margin pressure in Personal Systems, the segment that includes PCs. Chief Financial Officer Karen Parkhill said HP still expects fourth-quarter margins to mark the segment's low point. Higher-cost memory and component inventory will continue to flow through the income statement, which is a polite way of saying the pain isn't over yet.
Management expects input costs to rise into fiscal 2027, but at a slower pace. To counter that, HP plans to use product redesigns, platform improvements, and revised supplier contracts to support a margin recovery. It's a strategy that sounds sensible, but it takes time to execute.
Higher prices have also pressured demand. Some customers have delayed PC upgrades, though HP expects some demand to return as costs stabilize. That's a hopeful note, but it's not a guarantee.
AI PCs Gain Ground
One bright spot is the growing adoption of AI PCs. They accounted for 46% of HP's third-quarter shipments, and the company expects that share to reach 50% by the end of fiscal 2026. Personal Systems President Ketan Patel is even more optimistic, projecting AI PCs to represent 60% to 70% of shipments in fiscal 2027 and more than 70% in fiscal 2028.
Patel said businesses increasingly recognize the benefits of running AI locally, including lower cloud costs, stronger data privacy, and faster performance. It's a compelling pitch, and it seems to be resonating. HP gained 2.6 percentage points of sequential market share in premium PCs and 1.8 points in workstations. Peripherals, collaboration products, and services now generate about one-third of Personal Systems' gross profit, which helps diversify the revenue stream.
The company is also working with more than 150 software vendors to expand its AI application ecosystem, which could be a key differentiator in the coming years.
Print Revenue Slips
Not everything is rosy, though. Print revenue fell 2% year over year, dragged down by weak commercial office demand in North America and China, along with pressure in Middle East supplies. One-time tariff refunds boosted segment results, but underlying margins remained in line with expectations. HP maintained its long-term Print operating margin target of 16% to 19% for fiscal 2027, which suggests management sees this as a temporary blip.
So, what's the takeaway? HP is navigating a tricky environment where rising costs are squeezing margins, but it's also positioning itself for growth in AI PCs. The market's reaction on Thursday, with shares falling 10.52% to $27.32 in premarket trading, shows that investors are wary of the near-term pain. But if management's plans to recover margins play out, Q4 could indeed mark the bottom.
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