What’s Next For HPE Stock?

Hewlett Packard Enterprise (NYSE:HPE) recently announced its Q2 fiscal 2025 results (fiscal ends in October), slightly exceeding analyst expectations. The company reported earnings of $0.38 per share on revenues of $7.6 billion, surpassing consensus estimates of $0.33 and $7.5 billion, respectively. Despite this positive outcome, HPE’s stock remained largely unchanged around $18. This stagnation can be partly attributed to the company tightening its full-year revenue growth forecast to 7% to 9%, down from its prior projection of 7% to 11%. Now, if you are looking for steady returns, you may want to consider looking at diversified investment options such as the Trefis High Quality portfolio, which has shown remarkable performance, achieving over 91% returns since its inception. Additionally, see – What’s Happening With Rigetti Computing Stock? 

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Valuation Perspective

Given HPE’s recent performance, you might be wondering if it’s currently a good investment. From a valuation perspective, we think HPE stock appears to have room for growth. Trading at approximately $18 per share, it’s valued at 0.7 times its trailing revenues. This is slightly lower than its three-year average price-to-sales (P/S) ratio of 0.8 times.

While a decrease in valuation multiples might seem justified by the company’s average revenue growth of just 3% over the last three years and a decline in its net income margin from a three-year average of 6% to 4% currently, this doesn’t tell the whole story.

Strong Q2 Performance and Future Growth Drivers

HPE’s Q2 results demonstrated year-over-year revenue growth of 6%. Its Annualized Revenue Run Rate (ARR) surged by 46% to $2.2 billion, driven by a strong 13% rise in hybrid cloud revenue, a 7% increase in intelligent edge segment sales, and a 6% boost in server revenue.

Although the adjusted gross margin decreased by 370 basis points year-over-year to 29.4%, HPE’s net income was significantly impacted by a non-cash impairment charge of $1.4 billion for legacy goodwill, resulting in a GAAP loss of $0.82 per share. However, on an adjusted basis, HPE reported earnings of $0.38 per share, marking a slight decline from $0.42 in the same quarter last year. Looking ahead, HPE’s Q3 revenue outlook of $8.2 billion to $8.5 billion also exceeded the consensus estimate of $8.17 billion.

Building on the valuation discussion, HPE is currently experiencing faster growth than it has had over the past three years. Analysts project sales to grow by 8% this year and an additional 6% next year. This accelerating growth trend suggests that an upward adjustment in valuation multiples is warranted. Notably, the average analyst price target for HPE is $21, indicating an upside potential of over 15%. This target reflects a 0.9 P/S ratio, compared to the current 0.7x and the three-year average of 0.8x.

What’s Driving HPE’s Growth?

HPE’s strategic focus is on its edge-to-cloud platform transition, particularly leveraging its GreenLake hybrid cloud offering. This strategy aims to capture recurring revenue through flexible consumption models that seamlessly connect on-premises and cloud environments. The company’s strategic shift toward edge, hybrid cloud, and AI delivered through the HPE GreenLake platform is proving successful. Furthermore, HPE’s partnership with NVIDIA for integrated AI computing solutions positions it competitively against hyperscaler-focused alternatives by offering enterprise customers on-premises and edge deployment flexibility. On a separate note, check out – What’s Behind Enphase Energy’s Stock Collapse?

Risks to Consider

While HPE stock’s valuation appears to offer room for growth, it’s crucial to consider potential risks. Historically, HPE’s stock has underperformed the broader market during economic downturns. For instance, it fell by 32% from its peak during the 2022 inflation shock, compared to a 25% decline for the S&P 500. Similarly, during the COVID-19 pandemic correction in 2020, it dropped by 52% versus a 34% decrease for the S&P 500. This trend suggests that HPE stock is more vulnerable to negative macroeconomic conditions. See – Buy or Sell HPE Stock – for more details.

You may want to buy HPE stock in the current dip but remember investing in a single stock, no matter how promising, is risky. If you want to diversify that risk while exposing yourself to strong upside, consider the High Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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