Why HPE’s Dip Is a Prime Opportunity for Blue-Chip AI Investors

Key Points

• Hewlett Packard Enterprises fell on solid results, opening a buy-the-dip opportunity the market is taking advantage of. 
• Cash flow remains solid and can sustain the capital return, including dividends and share repurchases.
• Growth is expected to accelerate in 2025 as businesses spend more heavily on AI applications. 

Hewlett Packard Enterprises NYSE: HPE is an attractive, high-yield play for blue-chip investors seeking exposure to AI because of its position in the enterprise industry, cash flow, and capital return. Its enterprise-quality networking and server products are critical for many businesses and are gaining traction with AI, as seen in the Q3 results and guidance. 

While share prices are down following the release, the move is a knee-jerk reaction, opening a solid buying opportunity in a quality dividend-paying stock. Simply put, Hewlett Packard Enterprise’s dividend is among the highest in tech and ultra-safe, with no expectation for cuts and every reason to expect increases over time.

Hewlett Packard Enterprise’s dividend is ultra-safe because of its earnings, cash flow, free cash, and balance sheet. The balance sheet is a fortress with assets rising, low leverage, and growing equity. Highlights from Q3 include a cash reduction, but that is offset by increased receivables and inventory, with the net result of a 4% increase in equity. 

The dividend is high-yielding at roughly 2.8%, with shares near $17.50, more than double the broad market average at less than half the cost. Trading at 9x earnings with growth resumed and accelerating and guidance raised, HPE stock has a deep value compared to the broad market, let alone the leading cloud technology providers, suggesting a price multiple expansion could unfold over the next year. 

HPE: AI and Diversified Business Drive Growth in Q3

Hewlett Packard Enterprises had a solid quarter in Q3, showing robust growth in the Server segment and the strength of its diversified portfolio. The $7.71 billion in net revenue is up 10.1% compared to last year and outpaced the consensus by 50 basis points on strength in demand for its AI-server products, including AI conversions. 

Server sales are up 35%, with sales leverage driving a wider margin. This is offset by a 23% decline in the Intelligent Edge segment and a 7% decline in Hybrid Cloud. While troubling, the declines in the IE and HC segments are not as big a problem as they have been because sales are improving sequentially and are expected to return to growth with the turn of the fiscal year. 

Margin news is mixed but aligns with an outlook for higher share prices. The company experienced significant deleveraging in the IE and HC segments, partially offset by strength in Servers. The net result is a 410 basis point decline in the adjusted gross margin, which is less than expected. As with sales, the margin is up sequentially in the IE and HC segments and is expected to continue improving as demand builds. Demand in those segments will likely accelerate in 2025 due to increased annual spending on AI business applications, which is expected to quadruple within three years. 

Hewlett Guides the Market Higher 

HPE guidance is another reason for investors to look past sluggishness in the IE and HC segments. HPE management increased the outlook for Q4 results to align with consensus, putting the full-year estimates above the consensus and leading analysts to revise their targets. 

The first revision tracked by MarketBeat.com is from UBS, which maintained its Neutral rating but raised its price target. UBS's new target is $19, which raises the low end of the range and the consensus, implying a 25% upside from the post-release lows. The revision trend ahead of the report is also favorable, including numerous price target increases and at least one upgrade that puts this market at the high end of the target range. 

The price action following the release is mixed. Shares are down about 10% at their lows but showing support at a critical level. That level is consistent with a prior resistance point and the bottom of the recent trading range. This level should continue to support the market and potentially lead to a rebound before the year’s end. The risk is a move below $17, which could result in a retest of support at the 30-month EMA near $16.25.