Loop Capital raises HP Enterprise target to $18, holds rating

Loop Capital raised its price target on HP Enterprise to $18 from $16, maintaining a Hold rating, after HPE reported strong Q2 server revenue growth of 7% year-over-year, driven by AI server orders reaching $1.1 billion and a rebound in the intelligent edge segment. HPE narrowed its FY25 revenue growth forecast to 7-9% and increased EPS guidance to $1.78-$1.90. However, UBS analysts, while raising their price target to $18, highlighted concerns about HPE's AI order volume compared to Dell, potentially impacting valuation despite optimistic guidance.

Analysis

Loop Capital Markets raised its price target for HP Enterprise (HPE) to $18.00 from $16.00, maintaining a Hold rating, following HPE's April quarter earnings. The report highlighted a 7% year-over-year increase in Server revenue to $4.1 billion, driven by $1.1 billion in net new AI server orders; HPE also converted $1 billion from its AI backlog into revenue, marking a 10% rise both year-over-year and quarter-over-quarter, and ended the quarter with a $3.2 billion total backlog. Management has addressed previous server operating margin issues and now projects these margins to reach 10% by the end of fiscal year 2025, up from the current 5.9%. Positive momentum was also observed in the Hybrid Cloud segment, with the Alletra product line showing triple-digit year-over-year growth and 300 new customer logos added quarter-over-quarter, and the Intelligent Edge segment returning to year-over-year revenue growth. Based on these results, HPE narrowed its fiscal year 2025 revenue growth forecast to 7-9% and increased its EPS guidance to $1.78-$1.90. For its recently reported quarter (referred to as its second quarter, with results for the April period), HPE announced EPS of $0.38 on $7.6 billion revenue, beating estimates, but also reported a negative free cash flow of -$847 million and a 5% workforce reduction. While UBS also increased its price target to $18 with a Neutral rating, it noted a significant gap in AI system orders between HPE ($1.1 billion in the quarter, $4.6 billion over five trailing quarters) and Dell ($12.1 billion in the quarter, $23.2 billion over five trailing quarters), which could impact HPE's valuation despite the stock trading near $18.11 and possessing a 2.87% dividend yield according to InvestingPro.

Key Decisions for Investors

• Investors should assess HPE's valuation considering the Hold/Neutral ratings from analysts and the stock trading near revised price targets, balancing improved operational results, particularly in server margins and AI revenue conversion, against competitive pressures in the AI sector.
• Closely monitor HPE's ability to scale its AI server business and narrow the significant order volume gap with key competitors like Dell, as this is a critical factor for its future growth trajectory and market valuation.
• Factor in the reported negative free cash flow of -$847 million and the announced 5% workforce reduction as potential indicators of ongoing restructuring or efficiency challenges that may impact short-term financial health, despite positive forward guidance for revenue and EPS in fiscal year 2025.