JPMorgan Bullish On Hewlett Packard Enterprise's Future, Cites 'Durable' Non-AI Segments, Capital Returns

Hewlett Packard Enterprise (HPE) reported Q2 revenue of $7.63 billion (vs. est. $8.17B) and adjusted EPS of 38 cents (vs. est. 41 cents), while raising the low end of its FY25 adjusted EPS guidance to $1.78-$1.90. AI server revenue more than doubled sequentially, driving backlog to $3.2 billion, and management anticipates continued strength in Q3, despite broader macro concerns and AI server competition. JPMorgan analysts modestly tweaked revenue and margin outlook, noting management's focus on profitable AI deals, strong demand in non-AI segments, and potential for increased capital returns, leading to EPS estimates of $1.85 for 2025 and $2.10 for 2026.

Analysis

Hewlett Packard Enterprise's (HPE) second-quarter financial results presented a nuanced picture: reported revenue of $7.63 billion and adjusted earnings per share (EPS) of 38 cents fell short of Wall Street's consensus estimates of $8.17 billion and 41 cents, respectively. However, these figures reportedly surpassed the company's internal guidance, a performance attributed primarily to the burgeoning Artificial Intelligence (AI) systems segment, where revenue more than doubled sequentially, and the order backlog expanded to a significant $3.2 billion. This robust AI momentum, driven by a strategy focused on profitable deals, is a key positive, allowing HPE to navigate intense competition and broader macroeconomic concerns. In contrast, HPE's third-quarter outlook, with revenue projected between $8.2 billion and $8.5 billion and adjusted EPS between 40 and 45 cents, trails current analyst expectations of $8.85 billion and 56 cents. Despite this cautious near-term guidance, HPE offered a more optimistic view for fiscal 2025, forecasting 7% to 9% revenue growth and raising the lower end of its adjusted EPS guidance to $1.78-$1.90. This longer-term optimism is echoed by JPMorgan analysts, who project EPS of $1.85 for 2025 and $2.10 for 2026, citing resilience in non-AI segments like networking and storage, particularly in North America, and management's signaling of an increased appetite for capital returns and portfolio optimization, potentially spurred by Elliott Investment Management's past involvement.

Key Decisions for Investors

• Investors should weigh the significant growth and $3.2 billion backlog in HPE's AI server division against the Q2 revenue and EPS miss versus consensus, and the softer-than-expected Q3 guidance.
• Monitor the company's ability to convert its AI backlog into sustained revenue and profitability, as this is crucial for achieving its upwardly revised FY25 EPS guidance and justifying longer-term growth projections.
• Consider the potential for value creation from signaled capital return enhancements and strategic portfolio actions, which could provide upside catalysts, especially given the mildly positive market reaction and analyst outlook for FY25 and beyond.