Hewlett Packard Enterprise: Buy Earnings on Strong Server Growth (NYSE:HPE)

Hewlett Packard Enterprise (NYSE: HPE) will report 3’24 earnings on September 4, 2024, with mixed sentiment from analysts. In the last 90 days, analysts revised EPS down 7 times and down 5 times. Using Dell Technologies (DELL) q2’25 results as a guideHPE can achieve significant growth and margin expansion for their general computing servers and AI infrastructure. Given the strong demand in this space, coupled with demand for commercial endpoints, I believe HPE can achieve similar strength in the eq3’24. I will reiterate my BUY rating with a raised price target of $28.70/share to 6.7x EV/aEBITDA.

For eq3’24, I estimate revenue and EPS to reach $7.9 billion and $0.52/share, respectively. Consensus estimates for the same numbers are $7.6 billion and $0.46/share in the middle.

HPE investment thesis

HPE is one of the infrastructure aggregators competing for the market share in the general space of the compute server and the AI ​​server infrastructure. IDC forecasts the server Market spending will grow at a CAGR of 12.3% over the next 5 years, driven by a shift in the mix in GPU servers. The research firm estimates this will be $144 billion in 2024 and $157 billion in 2025 for x86 servers alone. Statista forecasts the AI ​​market to grow to $243 billion in eCY25 from $184 billion in eCY24.

According to Bloomberg, 7,000 data centers are being built globally. ABI Research estimates a total of 5,697 public data centers available by the end of 2024, of which 511 will be hyperscale sites. Given the increasing adoption for AI/ML applications, the supporting infrastructure must be put in place to support this demand. This will include GPU + CPU servers, Ethernet and inevitably endpoints.

Given the positive growth data achieved in CYq2’24, I have reason to believe that HPE will experience a strong earnings footprint in its next Q3’24 report. Dell Technologies reported a strong 2’25 quarter print on August 29, 2024, driven by sequential improvements to general computing servers and strong demand for AI server infrastructure. I believe HPE will experience similar branded infrastructure results in the next quarterly print as enterprises and hyperscalers continue to build out their high-performance computing infrastructure to meet the demands of AI/ML training and inference.

Advanced Micro Devices ( AMD ) and NVIDIA ( NVDA ) each reported exceptionally strong growth for their GPUs, the MI300X and H100, respectively. Unlike Super Micro Computer’s (SMCI) challenges in sourcing the infrastructure for their server racks, I believe HPE is in a stronger position to source the necessary infrastructure without cutting into margins. Dell Technologies reported strong operating margin expansion in their Q2’25 results, rising from 52% in Q2’24 to 63% in Q2’25. This trend is likely to be followed in HPE’s earnings given its market reach and similar product categories. On a sequential basis, I believe HPE’s server segment will grow 17% to reflect this strong growth in GPU + CPU demand. Given Nvidia’s customer mix of ~60/40 enterprise/hyperscaler sales, this could put HPE in a strong position for margin expansion for their servers. In total, Nvidia’s revenue rose 122% in the June 2024 quarter, driven by GPU sales. AMD saw similar growth, with the data center segment growing 2.14x in the June 2024 quarter, also driven by growth in their GPUs.

In addition to strong server growth, I anticipate that HPE will achieve sequential growth in their intelligent high-end segment, driven by enterprise investments in networking equipment. Cisco Systems ( CSCO ) and Arista Networks ( ANET ) each suggested that stock digestion is behind networking companies and that sequential growth has returned. Cisco specifically suggested that sales of campus networking equipment are strengthening as enterprises configure their networks to meet the bandwidth requirements to run production AI applications. If this translates into HPE networking equipment, it can lead to sequential growth throughout eFY24 for the infrastructure company and lead to improved sales and operating margins. I forecast 7% sequential smart margin growth for eq3’24, with eFY24 YoY growth of 15%.

HPE Financials

Looking at HPE’s financials, I think the firm is well positioned to realize strength by the end of eFY24 and eFY25. For eq3’24, I estimate revenue to reach $7.9 billion with diluted EPS of $0.52/share. For eFY24, I estimate revenue to rise to $30.6 billion, with eFY25 bringing in $32.7 billion. I anticipate diluted EPS to come in at $1.64/share and $2.03/share for eFY24 and eFY25, respectively. This will increase free cash flow to $2.27 billion and $2.7 billion for eFY24 and eFY25, respectively. I believe HPE will realize significant strength in the intelligent server and edge segments as a result of the development of AI infrastructure by enterprises and hyperscalers.

Valuation and shareholder value

HPE stock currently trades significantly below its infrastructure integrator peers at 7x EV/EBITDA on an unadjusted basis.

I think this positions HPE as a value play in the server space, especially when we consider the growth opportunity in play with private, public and hybrid cloud environments. I believe HPE will achieve similar growth in their server and networking segments as peers achieved in eq3’24, which will likely be reflected in the share price after earnings. As a result, I raise my price target to $28.70/share at 6.70x eFY25 EV/aEBITDA and reiterate my BUY rating.

The valuation model below consists of historical trading premiums for HPE paired with a probability factor of achieving these multiples. The factors are related to my aEBITDA estimate for eFY25.