Summary
- Xerox's shares are cheap following the broader market selloff in early 2020.
- COVID-19 has suppressed revenue substantially, and the shift to online work poses a threat to their revenue in the long term.
- However, maintenance and service revenue is likely to see a post-COVID-19 jump as much of it has been deferred.
- Additionally, the company's dividend and share buybacks are attractive.
- Finally, the company has long-term growth potential in 3D Printing.
Xerox (XRX) is cheap as a result of the 2020 selloff, with relatively bleak prospects for the company so long as the pandemic remains relevant. The company's valuation is quite low, but some longer-term risks remain. Nonetheless, Xerox may be worth a look as a recovery bet and as a speculative bet on the long-term growth potential of 3D printing.
COVID-19 Impact
Coronavirus has a significant impact on Xerox's business, with second quarter revenue dropping by 35.3% year over year. Adjusted earnings per share fell to 15 cents per share from 64 cents a year ago. The company lost a significant amount of service revenue - which accounts for the largest share of the company's overall revenue - as customers' deferred maintenance and lockdowns prevented accessing machines.
A major risk to Xerox is that companies decide to discontinue usage of offices, and thus the Xerox products inside them - primarily printers - such as REI, who decided to sell their brand-new headquarters while keeping employees working remote. Employees working from home likely already have printers, but the revenue opportunity in servicing those printers is significantly lower than the more complicated ones in offices. It is conceivable that individuals may purchase more expensive models once remote work is decided to last more long term, but the need for physical paper copies of documents is no longer as pertinent in an online environment. This could transfer over once offices return to work, with online file sharing becoming more and more prevalent as it is undoubtedly the primary medium of communication. A longer-term revenue decline from lower printing volumes seems more than likely at the moment.
