Bernstein downgraded Hewlett Packard Enterprise Co (NYSE:HPE) to a Market Perform rating (From Outperform) and cut their 12-month price target on company shares to $17.00 (from $20.00) ahead of the information technology company’s announced plans to acquire Juniper Networks (NYSE:JNPR) for $14 billion.
Analysts at Bernstein would rather the company consider acquiring multiple smaller, high-growth assets, similar to IBM's approach and HPE's previous acquisitions of Aruba and SilverPeak, instead of JNPR, which has a trailing 10-year revenue compound annual growth rate (CAGR) of less than 2%.
“While we acknowledge there are multiple paths to value creation, including M&A, we are not optimistic that the acquisition of Juniper will meaningfully change the company’s growth profile, which we believe has been the biggest gating factor to the stock’s multiple.” Write analysts in a note.
HPE’s guidance indicates heavy focus on the second half of the year, and the goals for Aruba seem ambitious, especially given the expectation of significant declines in the second half of the year. This is against a challenging backdrop of backlog drawdown comparisons in the latter part of 2023. While HPE seems to have a sizable AI server backlog, it's unclear just how many of the orders genuinely add to growth, as opposed to being a reshuffling or compensating for the decline in its existing Cray Supercomputing backlog.
Furthermore, Bernstein has concerns that HPE will be internally focused over the next 1-2+ years as it prepares for and integrates JNPR. This could create opportunities for competitors.
Analysts highlighted that historical experience with transformative M&A has been generally poor. They believe that realizing revenue synergies between HPE and JNPR won't be straightforward, given the probable differences in organizational structures, brands, and software platforms.
Shares of HPE are down 3.65% in early trading Tuesday morning.