AI Propels HPE's Server Business: Is the Growth Thesis Strengthening?

Hewlett Packard Enterprise's server business grew 5.6% in Q2, largely propelled by AI systems which secured $1.1 billion in new orders and built a $3.2 billion backlog, effectively offsetting a slowdown in traditional server sales. The introduction of the ProLiant Gen 12 platform is enhancing HPE's competitive standing, with the company forecasting mid-teens sequential growth for Q3 and low double-digit server revenue growth for FY25. This robust AI-driven demand, mirroring a broader industry trend benefiting peers like Dell and Super Micro Computer, is anticipated to drive a 26.5% EPS increase for HPE in FY26, following a projected 5% decline in FY25.

Analysis

Hewlett Packard Enterprise is demonstrating a successful strategic pivot towards the high-growth AI server market, which is effectively offsetting a concurrent slowdown in its traditional server business. The company's server division grew 5.6% in the second quarter, propelled by the AI segment which secured $1.1 billion in net new orders and accumulated a substantial $3.2 billion backlog. This momentum is expected to continue, with management guiding for mid-teens sequential revenue growth in Q3 and low double-digit server revenue growth for fiscal 2025. The introduction of the new ProLiant Gen 12 platform, featuring direct liquid cooling, further strengthens HPE's competitive position. Despite this operational strength and a projected 14.2% YoY revenue increase for fiscal 2025, the company's stock has notably underperformed its industry year-to-date, gaining only 5.7% versus the industry's 25.4%. This performance lag is reflected in its valuation, with a forward price-to-sales ratio of 0.76, significantly below the industry average of 3.46. While consensus estimates point to a 5% earnings per share decline in fiscal 2025, a strong rebound of 26.5% is anticipated for fiscal 2026, supported by recent upward analyst revisions.

Key Decisions for Investors

• Given the substantial AI server backlog of $3.2 billion and strong forward guidance, investors may view HPE's significant valuation discount and stock underperformance relative to its industry as a potential value opportunity.
• It is critical to monitor the company's ability to convert its AI backlog into revenue to offset the traditional server decline, as this execution will determine whether it can achieve the forecasted 26.5% EPS growth rebound in fiscal 2026 after the projected dip in 2025.
• Investors should benchmark HPE's server growth and margins against key competitors like Dell and Super Micro Computer, as the entire sector is benefiting from the AI trend, making market share gains and technological differentiation key long-term value drivers.