Is Hewlett Packard Enterprises Still a Cheap AI Server Play?

Key Points

• Hewlett Packard Enterprises provides IT infrastructure solutions to business customers, including AI servers, storage and networking products.
• Super Micro Computers and Dell Technologies soared on their AI server business, surging their valuations to 58.99X and 18.54X forward earnings, respectively.
• Hewlett Packard Enterprises shares trade at 9.67X forward earnings as its AI server business was stifled due to GPU supply constraints, which it expects to normalize in the second half of 2024.

What do Super Micro Computer Inc. NASDAQ: SMCI, Dell Technologies Inc. NYSE: DELL and Hewlett Packard Enterprise Co. NYSE: HPE have in common? They are all in the computer and technology sector, and they all make artificial intelligence (AI) servers. They all predominantly use Nvidia Co. NASDAQ: NVDA GPUs for their AI servers but also use Advanced Micro Devices Inc. NASDAQ: AMD and even Intel Inc. NASDAQ: INTC graphic processing units (GPUs) due to supply constraints.

Valuation is Lagging?

What don't they have in common? Valuation. Super Micro Computers shares trade at 57.99x forward earnings. Dell Technologies shares trade at 18.54X forward earnings. Hewlett Packard Enterprises shares trade at just 9.67x forward earnings. Granted, Super Micro and Dell have acknowledged that their AI server business is surging as they have blown away EPS estimates.

Dell noted that its AI servers have a $2 billion backlog and cannot keep up with the demand. On the other hand, Hewlett Packard saw campus networking product demand deteriorating in Europe and Asia. However, its AI demand was strong but hurt due to GPU supply issues. Check out the sector heatmap on MarketBeat.

Juniper Acquisition Distraction

The market may also be distracted by Hewlett Packard's announcement in January 2024 to acquire networking giant Juniper Networks Inc. NYSE: JNPR for $40 per share or $14 billion. The move is designed to bolster Hewlett Packard's footprint in the AI-native networking segment. It will double Hewlett-Packard's networking business, which will be bolstered by Juniper's traditionally strong margins.

It provides its enterprise customers with a one-stop solution for storage and networking needs, including wireless, wired, and cloud-based solutions. Hewlett Packard is cementing its opportunity to provide cutting-edge AI-driven network fabric, enabling enterprises to train and deploy AI applications. The deal is expected to close in late 2024 to early 2025.

Slow Start to the New Year

Hewlett Packard reported an EPS beat of 3 cents in its fiscal Q1 2024 earnings of 48 cents versus 45 cents consensus analyst estimates. Revenues fell 13.5% YoY to $6.75 billion, missing analyst estimates of $7.09 billion. Annualized revenue run-rate (ARR) rose 42% YoY to $1.4 billion. GAAP gross margins grew 240 bps to 36.4%.

Server business fell 23% YoY to $3.4 billion. Intelligent Edge revenues fell 3% YoY to $1.2 billion. Hybrid Cloud revenues fell 10% YoY to $1.2 billion. Financial Services revenues were flat YoY at $873 million.

Lowering the Bar

Hewlett Packard Enterprises provided downside fiscal Q2 2024 EPS of 36 cents to 41 cents versus 45 cents consensus analyst estimates. Revenues are expected to be between $6.6 billion and $7 billion versus the consensus estimates of $7.12 billion.

Full year 2024 EPS is expected to be between $1.82 and $1.92 versus $1.92 consensus estimates. Revenues are expected to be flat to up 2% YoY or $29.135 billion to $29.718 billion versus $29.45 billion consensus estimates.

Hewlett Packard Enterprises CEO Anthony Neri commented, "Despite a mixed quarter, I remain very confident that our focus on customer-centric innovation and our track record of operational discipline will allow us to capitalize on the significant market opportunities in AI as well as across edge and hybrid cloud and to deliver value to our shareholders."

Second Half Acceleration Story

Hewlett Packard combined its Computer, high-performance computing (HPC), and AI segments into a single server segment while placing its hybrid cloud products into a single business segment. The key is AI chip supply, which should normalize in the second half of 2024. This should accelerate its AI server business. It also expects large GreenLake deals to materialize in the second half of 2024. GreenLake is its edge-to-cloud platform.

Hewlett Packard Enterprise analyst ratings and price targets are at MarketBeat. The MarketBeat stock screener can help you find Hewlett-Packard Enterprise's peers and competitor stocks.

Daily Descending Triangle Breakout

The daily candlestick chart on HPE illustrates the descending triangle breakout pattern. The descending upper trendline commenced at the $17.80 peak on January 8, 2024, capping each rally attempt at a lower high. The flat-bottom lower trendline at $14.80 appeared to break down on its Q1 2024 earning release as it hit $14.47 and sharply reversed higher on March 1, 2024. This caused HPE to break through the descending trendline for the next three days, surging to an all-time high of $20.07 before pullbacks set into the $17 to $18 price range. The daily relative strength index (RSI) soared from the 40-band up to the 82-band before sharply reversing back down to test the overbought 70-band. Pullback supports are at $17.48, $16.59, $15.56 and $14.80.