Where will Hewlett Packard Enterprise stock be in one year?

hewlett packard enterprise‘S (HPE 2.25%) The stock soared 11% on June 5 after posting its latest earnings report. During the second quarter of fiscal 2024, which ended April 30, the enterprise hardware, software and consulting company reported revenue of $7.2 billion, up 3% year over year and exceeding analyst estimates by $370 million. Adjusted earnings per share (EPS) fell 19% to $0.42, but still beat consensus forecasts by $0.03.

Although these growth rates may seem modest, investors seemed relieved that the company had passed Wall Street’s low bar. The stock is already up about 30% in the last 12 months, but will it go even higher next year?

Image source: Getty Images.

What happened to HPE over the past year?

In fiscal 2023, which ended last October, HPE’s revenue and adjusted EPS increased 2% and 6%, respectively. However, as the following table shows, sales increased again in the second quarter of fiscal 2024 after declining for two consecutive quarters. As adjusted EPS declined for three consecutive quarters, adjusted gross margin also declined. However, annual recurring revenue (ARR) continued to grow at a healthy pace as it locked more customers into its cloud-based services.

Data source: HPE. YOY = compared to the previous year.

In fiscal 2023, growth in HPE’s Intelligent Edge, HPC & AI, and Financial Services segments largely offset macro-induced weakness in its Compute and Storage segments. At the beginning of fiscal 2024, we reorganized these five segments into four simpler segments: Servers, Intelligent Edge, Hybrid Cloud, and Financial Services. This accounted for 54%, 15%, 17% and 12% in the second quarter. revenue respectively.

HPE’s server sales accelerated significantly in the second quarter of fiscal 2024 as more enterprises upgraded their servers to handle more demanding artificial intelligence (AI) workloads. “We are seeing signs of market recovery in both traditional and cloud infrastructure markets as we take advantage of AI growth opportunities,” CEO Antonio Neri said in the conference call. Neri said the corporate public sector and small and medium-sized businesses (SMBs) in North America and Europe are leading the recovery.

Growth in HPE’s server business also offset declines in its intelligent edge and hybrid cloud businesses. For both businesses, comparisons to previous years are more challenging. However, the shift from high-margin intelligent edge revenue centered around AI to lower-margin server revenue led to a decline in gross margin. This pressure has been further compounded by an unfavorable mix of low margin revenues within the hybrid cloud business.

What will happen to HPE in the next year?

HPE expects third quarter revenue to increase 6% to 11% year over year and to increase 1% to 3% at constant exchange rates for the full year. This is slightly higher than our previous full-year forecast for sustained currency revenue growth of 0-2%.

Adjusted EPS is expected to decline 2% to 12% year-over-year in the third quarter and 9% to 14% for the full year. This is also higher than the company’s previous full-year outlook, which called for an 11% to 15% decline in adjusted EPS.

This stronger-than-expected guidance suggests that HPE’s cyclical slowdown is coming to an end and that its AI-powered, modern server sales will continue to offset weakness in its other businesses. However, these changes will continue to compress gross margins in the near term and it still faces stiff competition from similar server manufacturers such as: Dell Technologies Dedicated AI server manufacturers such as: super micro computer.

HPE expects margins to stabilize through the end of the year as its other high-margin businesses recover. Analysts expect reported earnings to remain largely flat this year, with adjusted EPS down 13%. However, in fiscal 2025, we expect revenue and adjusted EPS to grow 4% and 9%, respectively, as the macro environment improves.

That’s a bright outlook for a stock that trades at just 11 times forward earnings while paying a forward dividend yield of 2.7%. Low valuations and high yields will limit downside potential as the core business gradually recovers.

Where will HPE’s stock be in a year?

HPE’s stock still looks cheap after the earnings boost, and the stock could move higher as macro headwinds dissipate, interest rates fall, and investors turn to cheap dividend stocks. It won’t explode as much as other AI-focused stocks over the next 12 months, but it will steadily move higher while paying a steady dividend.