Why We Revised HPE Price Estimate To $14

by Trefis Team
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HP Enterprise (NYSE:HPE) recently completed its restructuring process with the successful divestiture of its software business. Following this restructuring, we have updated our model to reflect these changes. Furthermore, the company has announced cost-cutting measures that could potentially translate into $1.5 billion in savings over the next three years. As a result of these measures and the divestiture, our price estimate for the company’s stock has been revised from $18 to $14, which is about in line with the current market price. In this note, we explore the factors that are driving the valuation of the company and our forecasts.

See our full analysis of HPE

HPE Cost-Cutting Measures To Boost Margins

HPE recently announced that it plans to cut close to 5000 employees, or 10% of its workforce, this year. According to the company, this will translate into cost savings of more than $1.5 billion over the next three years. While we expect margins to decline marginally in 2017, we forecast its EBITDA margin to improve in 2018 and 2019 due to these cost-cutting measures, before stabilizing at around 21% by the end of our forecast period in 2024.

Server And Storage Revenue Set To Improve

The Server and Storage division makes up over 52% of our price estimate for HPE’s stock. Within this vertical, the Server business accounts for 39% of HPE’s value. The server market rebounded in the second quarter of 2017 due to growth in the implementation of hyperscale data centers by Amazon and Google. While HPE continues to lead the market, its share and revenues have seen pressure due to declines in tier-1 server sales – sales to big clients, many of whom are increasingly using white box servers. Nevertheless, the company continues to focus on industry-standard servers, and its revenues from the segment continue to increase due to the growing popularity of its x86 servers and its strong brand. HP recently launched its Gen10 ISS servers, which offer enhanced security features for cloud deployment among a host of new capabilities. This has helped the company to increase its average sales prices over the past two quarters. We expect ISS to drive revenue growth for HP’s Server division in the future.

The Storage division makes up nearly 13% of HPE’s estimated value. The company offers all-flash storage through its Nimble line of products, and converged mid-tier storage solutions through 3PAR solutions. HPE’s storage revenues have also improved, as the company has a full range of flash storage solutions for customers across segments. Considering the demand for flash and converged storage among small and medium-sized companies, we expect that revenue for the storage division will improve to $3.8 billion by 2024.

Technology Services To Grow

HPE’s technology services make up nearly 30% of our estimate for HPE’s value. HPE continues to report double-digit growth in revenues from its strategic enterprise services such as cloud, mobility, security and big data. Cloud services will potentially be the biggest revenue source for HPE in 2017. Converged cloud infrastructure built on technologies like converged storage, software-defined networking, and the ISS server platform will power cloud computing by seamlessly integrating big data analytics and security. HPE also recently announced its intent to acquire Cloud Technology Partners, a cloud consulting company that has Fortune 500 customers. The company hopes that CTP’s consulting, design and operational advisory services for cloud environments will strengthen its hybrid IT consulting expertise. We also expect technology services to report marginal growth in revenues due to the organic expansion of services.

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