Server, Storage Verticals Continue To Drive HPE’s Value

by Trefis Team
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Hewlett Packard Enterprise‘s (NYSE:HPE) Server and Storage businesses account for over 50% of our $14 price estimate for the company’s stock, which is in line with its current market price. We currently forecast modest revenue growth for the company, much of which will be driven by the Server and Storage units. In this note, we explore why the segments are likely to remain the company’s key value drivers going forward.

Server Margin Profile Set To Improve

The Server division accounts for around 40% of of the company’s value, per Trefis estimates. Over the past few years, revenues from the Server division have declined as the underlying industry has been witnessing a shift from branded server to white box (unbranded) products. As a result, the server shipments and revenues for branded companies have declined, while overall server shipment and revenues have improved.

HPE is exiting the custom commoditized Tier -1 server market and is now focusing on core servers, which have higher average prices and margins. The company recently launched the most secure industry standard server and Edgeline Converged Systems, which addresses the industrial IoT domain. We expect the company to report higher margins in the coming quarters due to these new launches, while its revenues will likely decline as it exits the commoditized server business. Currently, we project revenues to decline to $11.3 billion by 2024, but expect EBITDA margins to improve by 170 basis points to 21.3%. However, if EBITDA margins were to improve further to 22.3%, there would be a 7% upside to our stock price estimate.

Flash And AI Based Storage To Boost Storage Revenues

Storage accounts for around 13% of HPE’s value, according to our estimates. The company’s revenues have grown in the last few quarters, though that was primarily due to inorganic growth. Its acquisition of Nimble has resulted in solid growth as global DRAM prices have been on the rise due to higher DRAM content in hybrid IT systems and significant under-supply of PC DRAM as well as a slowdown in capacity expansions. Prices could remain firm over the next year as well, with Global DRAM bit supply forecast to grow by 19.6 % in 2018, with bit demand growing at a higher rate. As a result, we believe that Nimble revenue will continue to grow in the next fiscal year.

Despite the improvement in storage revenues, HPE’s mid-tier storage company 3PAR has underperformed due to a tough competitive environment in the mid-range and some go-to-market challengesin certain markets. Nevertheless, the company has rolled out predictive AI technology across the entire 3PAR portfolio and also clubbed the Nimble and 3PAR sales teams. We expect that this should lead to some revenue and profit growth for HPE in the coming year.

Trefis currently projects the segment’s revenues to grow to $3.8 billion and margins to improve to 21.3% by 2024. If revenues were to grow to $5.1 billion driven by Nimble and AI-based storage, and EBITDA margins were to improve to 22.3%, there would be an 8% upside to our stock price estimate.

For precise figures, please refer to our full analysis for Hewlett Packard Enterprise

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