Rising AI PC Sales Can’t Hide HPQ’s Mounting Risks

Rising AI PC Sales Can't Hide HPQ's Mounting Risks

An 11% rally in a month. A mere 7x forward earnings multiple. And a genuine hardware upgrade cycle to AI PCs.

On paper, HP Inc (HPQ) looks like the kind of setup investors wait for.

The trends beneath the surface may be less appealing.

The AI PC Cycle Is Real

An AI PC is a computer with a dedicated chip for running artificial intelligence tasks locally on the device, rather than routing data to a remote server. The timing of this product cycle is meaningful. Microsoft (MSFT) ended support for Windows 10 in late 2025, which created a genuine deadline for businesses running older machines. Corporate IT departments are now in an active refresh phase, and AI PCs are the natural replacement target. HP reported that AI PCs accounted for 35% of its Q1 shipments, up from 25% just two quarters earlier, helping drive 11% revenue growth in the Personal Systems segment over Q1 FY'26.

The Memory Cost Crisis

For a hardware company like HP, top-line growth is a limited indicator of business health. Profitability is what ultimately matters, and it is deteriorating.

HPQ's operating margin for the Personal Systems segment fell to 5.0% in Q1, down from 6% in the same period a year earlier. (See HPQ margins vs peers)

The driver is a severe surge in memory costs. DRAM and NAND now account for 35% of the total build cost for a PC, up from roughly 18% historically, with some components doubling in price sequentially. HP is taking steps to contain further damage, including signing longer-term supply agreements and implementing targeted price increases in the commercial segment. Still, these measures do not reverse the deterioration in product economics that has already occurred.

While PC players are being impacted by the memory crisis, companies like Micron (MU) are benefiting. See How A $25B Investment Is Driving Micron's AI Memory Grab?

Apple's MacBook Neo

Apple (AAPL) has managed component cost pressures more effectively than its peers and is clearly looking to use the memory crisis as an opportunity to gain market share. Where most hardware companies respond to rising component costs by pushing customers toward higher-priced products, Apple has taken a different approach. Its latest devices carry more memory than previous generations, yet prices have moved up only marginally.

The more direct consequence for HP is Apple's March 2026 launch of the entry-level MacBook Neo at $599. That price point sets a ceiling in the mid-market and education segments. HP cannot raise prices in those categories to offset rising memory costs without pushing customers toward a credible and cheaper Apple alternative.

Demand May Not Hold

While the 11% growth over Q1 was impressive, it's very likely that customers pulled orders forward to get ahead of anticipated price increases. That acceleration inflated the revenue figure and may not repeat in subsequent quarters. Consensus estimates already reflect this reality, projecting revenue growth of just 2% for the full year, flat growth the following year, and earnings-per-share contraction for HPQ in the near term.

The Verdict

The AI PC narrative is well-founded. The profitability picture is not. A 5.0% operating margin in HP's primary growth segment leaves no buffer for further cost pressure or demand softness. The next major test arrives at the Q2 earnings call in late May, when investors will see whether that margin holds or slides further. The upcoming Q2 earnings call in late May is the moment of truth for profitability. Keep a tab on it here.

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