On Wednesday, Evercore ISI adjusted its outlook on HP (NYSE:HPQ) Enterprise (NYSE:HPE) shares, increasing the price target to $22 from $18 while maintaining an In Line rating.
The firm highlighted HP Enterprise's stronger-than-anticipated quarterly results, especially in the area of Artificial Intelligence (AI), where shipments surged from approximately $400 million in the previous quarter to around $900 million.
The company's optimistic stance on future AI opportunities was noted, with growing demand from sovereign and enterprise customers and success in its GreenLake AI offering, which was the fastest-growing segment of its Annual Recurring Revenue (ARR) in the quarter.
HP Enterprise's April-quarter earnings outperformed market expectations, reporting $7.2 billion in revenue with 42 cents per share, compared to the Street's forecast of $6.82 billion and 39 cents per share.
This performance represents a 3% year-over-year increase, driven largely by a robust 18% yearly growth in server strength due to accelerating AI demand and a resurgence in x86 compute. However, this was partially balanced by softer results in Hybrid Cloud and Edge segments, declining 8% and 19% year-over-year, respectively.
Despite weaker margins reported by competitors, HP Enterprise's server margins remained relatively stable, attributed to strategic self-help initiatives, including operational expenditure savings.
While the Edge segment is currently experiencing a prolonged period of inventory digestion, management anticipates a rebound in the second half of the year, particularly bolstered by the strength in State, Local, and Education (SLED) sectors in the United States.
In light of the increasing demand for AI and visible recovery in its core business, HP Enterprise has revised its full-year 2024 sales growth forecast to 1-3% in constant currency, up from the previous 0-2%, and raised its earnings per share (EPS) guidance to $1.85-1.95 from $1.82-1.92.
The company still expects Free Cash Flow (FCF) to be at least $1.9 billion. The backlog for AI system orders stands at $3.1 billion, with lead times for H100 GPUs now comfortably within a 6-12 week range.
Evercore ISI concluded that HP Enterprise's April-quarter results demonstrate the company's significant presence and competitive edge in the AI market, particularly as the industry shifts towards next-generation chips that require liquid cooling and additional services.
While there are ongoing questions about the recovery's consistency in the Edge business, the initial signs of improvement in the core business, alongside the momentum from growing AI demand and operational savings, are expected to contribute to accelerated top-line growth in the second half of 2024 and into 2025.
InvestingPro Insights
As HP Enterprise (NYSE:HPE) positions itself as a key player in the Artificial Intelligence market, InvestingPro data underscores the company's financial health and market position. With a market capitalization of $22.88 billion, HPE presents a P/E ratio of 12.05, which further adjusts to an attractive 10.32 when considering the last twelve months as of Q1 2024. This is complemented by a PEG ratio of just 0.1, suggesting that the stock could be undervalued relative to its earnings growth. Moreover, the company's dividend yield stands at 2.95%, a testament to its ability to maintain dividend payments for ten consecutive years, an aspect that income-focused investors may find appealing.
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