Hewlett Packard Enterprise artificial intelligence-related system growth slowed sequentially in its fiscal fourth-quarter earnings report. But Wall Street expects long-term upside for HPE stock from data center servers processing AI workloads.
The maker of computer servers, networking equipment and data storage systems reported fiscal Q4 earnings after the market close on Thursday.
"As we head into 2025, we see HPE well positioned to benefit from a recovery in IT spending from a cyclical recovery in servers, storage and networking and the Juniper acquisition and subsequent cost takeout," said Bank of America analyst Wamsi Mohan in a report.
He added that also working in HPE's favor will be "strength in hybrid cloud and higher AI server margins as enterprise/sovereign demand increases."
For the October quarter, HPE earnings rose 12% to 58 cents on an adjusted basis. Revenue rose 15% to $8.5 billion, the company said.
Analysts expected HPE earnings of 56 cents a share on sales of $8.25 billion.
Fiscal Q4 revenue from AI servers came in at $1.5 billion, up 16% from the previous quarter, vs. $900 million in fiscal Q3 and $400 million in the April quarter. Competition has heated up with Dell Technologies in AI servers.
HPE Stock: Nvidia Blackwell Ramp
"Management expects AI revenue declines quarter-over-quarter and expect improvement coincident with Nvidia's Blackwell GPU ramp," said Frank Louthan, analyst at Raymond James in a report. "Cumulative AI orders grew to $6.7 billion from $6.2 billion, but backlog declined to $2.4 billion from $3.4 billion in fiscal Q3 after de-booking a $700 million deal, but after the quarter end, additional orders brought backlog to $3.5 billion."
At Barclays, analyst Tim Long said in a report: "HPE posted revenue and EPS results above expectations, with strength in traditional servers and storage offsetting slight misses in AI servers and networking. AI server revenues of $1.5 billion missed our estimate of $1.7 billion, with orders of only $500 million. HPE debooked $700 million of AI server backlog as management is taking a cautious approach to riskier customers. While we would love to see more AI server revenue and order growth, we do believe it is prudent to be more selective with the AI business."
For the current quarter ending in January, the company forecast adjusted EPS in a range of 47 cents to 52 cents, versus estimates of 49 cents. HPE said it expects revenue growth in the "mid-teens."
On the stock market today, HPE stock rose 1% to 21.88 in early trading. Shares were up 28% in 2024 prior to the HPE earnings report.
Heading into the HPE earnings report, the tech stock had a Relative Strength Rating of 76 out of a best-possible 99, according to IBD Stock Checkup.
HPE Stock: Juniper Closing Near?
In early 2024, HPE agreed to buy Sunnyvale, Calif.-based Juniper Networks for $14 billion in cash. The purchase is expected to close soon.
HPE expects the deal to be earnings and free-cash-flow accretive in the first year post-close. However, HPE added significant debt to finance the transaction.
Morgan Stanley analyst Meta Marshall on Thursday upgraded HPE stock to over-weight prior to the earnings report release.
"With the close of the pending Juniper acquisition seemingly near, we think upwards of 40% to 50% of the pro-forma earnings power being driven by networking can help shares rerate to a (higher) multiple," he said in a report. "Combined with Juniper coming out of an inventory digestion and having new cloud customers, we are biased to think that there is more upside to Juniper's numbers in the near term
vs. downside."
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
