In this article, I compared two computer stocks: Dell Technologies (NYSE:DELL) and HP Inc. (NYSE:HPQ). Because these two companies have been fighting in the technology and computer hardware industries for many years, they are very similar in many aspects.
Closer inspection reveals that both equities are mixed in terms of quality, necessitating a wait-and-see strategy, but they may still be appealing to dividend investors due to their acceptable yields.
Yet, considering the current state of the technology industry, investors must exercise caution if they wish to invest there at this time. According to several reports, the computer hardware business has suffered some severe setbacks in the previous year or so as a result of rising economic uncertainties.
Furthermore, as computer sales decline, many businesses are moving to alternative revenue streams such as services.
Dell Technologies (NYSE:DELL)
Dell has a trailing price-to-sales (P/S) ratio of 0.3 and a P/E ratio of 17.6, implying that it is undervalued in comparison to the technology hardware industry. In terms of P/S, the company is back to where it was in the early days of the pandemic, in the depths of the 2020 bear market. Furthermore, Dell’s fundamentals are mixed, making a neutral outlook appear fair until more clarity on when the shares have bottomed out becomes available.
The technology hardware sector is trading at a P/E of 27.3 times and a P/S of 5.0 times its three-year average. Yet, given the tremendous uncertainty that has recently engulfed the tech sector, it appears likely that a sector-wide de-rating is begun. As a result, there may be further downside for Dell and HP, albeit both are likely to survive a recession.
On the one hand, Dell is heavily in debt, but on the other, it has consistently paid down more than it issues in new debt. Nevertheless, despite falling computer sales, the company’s revenue has increased from $101.2 billion in the fiscal year that ended in January 2022 to $105.3 billion in the last 12 months.
Furthermore, Dell intends to lay off 6,650 workers as a result of poor PC sales, as indicated by a huge drop in the fourth quarter. According to industry analyst IDC, Dell’s PC sales fell 37% year on year in the fourth quarter. PC sales account for more than half of Dell’s income, thus this is a major issue for the corporation.
Yet, Dell provides an appealing 3.22% dividend yield, a rarity in the computer business that may make the company worthwhile for income investors to retain.
HP Inc. (NYSE:HPQ)
HP has a trailing P/S of 0.5 and a P/E of 10, making it appear even more discounted than Dell. The company’s P/S ratio is slightly greater than it was in the early days of the epidemic in 2020. Yet, HP’s fundamentals remain mixed, suggesting that a neutral stance may be prudent until there is more transparency into sector multiples.
HP, like Dell and other PC and electronics behemoths, laid off about 6,000 staff in November. However, HP’s revenue remained constant in 2022, totaling $63 billion for the fiscal year ending in October 2022, compared to $63.5 billion the previous fiscal year. This means that the corporation should be able to weather a downturn with ease.
HP also generates a lot of free cash flow, with $3.67 billion in the prior year, down from $5.83 billion the previous year. One source of concern is that the corporation has recently issued more debt than it has paid down.
HP repaid $1.1 billion in debt in the last year but issued $4.2 billion in fresh debt. Time will tell whether this becomes a serious problem.
Finally, HP has a 3.55% dividend yield, which appears to be more solid than Dell’s, as the business has increased its dividend annually for the last seven years.
Dell and HP are two similar technology hardware companies that have faced challenges in the past year due to economic uncertainties and declining computer sales. While both companies have mixed fundamentals and a neutral stance may be prudent, they still offer attractive dividend yields for income investors. However, caution is advised for investors looking to invest in the technology industry at this time, as there may be further downside for the sector. Ultimately, it will be crucial to closely monitor the financial performance of both Dell and HP, especially as the industry undergoes significant changes and shifts towards alternative revenue streams such as services.
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