Hewlett Packard Enterprise's (HPE +0.58%) stock surged 11% on June 5 after it posted its latest earnings report. For the second quarter of fiscal 2024, which ended on April 30, the enterprise hardware, software, and consulting company's revenue rose 3% year over year to $7.2 billion and exceeded analysts' estimates by $370 million. Its adjusted earnings per share (EPS) fell 19% to $0.42 but still cleared the consensus forecast by $0.03.
Those growth rates seem tepid, but investors seemed relieved that the company cleared Wall Street's low bar. Its stock has already rallied about 30% over the past 12 months, but will it head even higher over the next year?
Image source: Getty Images.
What happened to HPE over the past year?
In fiscal 2023 (which ended last October), HPE's revenue and adjusted EPS grew 2% and 6%, respectively. But as the following table illustrates, its revenue fell for two consecutive quarters before growing again in the second quarter of fiscal 2024. Its adjusted gross margin also dipped as its adjusted EPS declined for three consecutive quarters. However, its annual recurring revenue (ARR) continued to grow at a healthy clip as it locked more customers into its cloud-based services.
|
Metric |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
4% |
1% |
(7%) |
(14%) |
3% |
|
ARR growth (YOY) |
35% |
48% |
39% |
42% |
37% |
|
Adjusted gross margin |
36.2% |
35.9% |
34.8% |
36.2% |
33.1% |
|
Adjusted EPS growth |
18% |
2% |
(9%) |
(24%) |
(19%) |
Data source: HPE. YOY = year over year.
In fiscal 2023, the growth of HPE's intelligent edge, HPC & AI, and financial services segments largely offset the macro-induced weakness of its compute and storage segments. At the beginning of fiscal 2024, it restructured those five segments into four simpler ones: server, intelligent edge, hybrid cloud, and financial services -- which accounted for 54%, 15%, 17%, and 12% of its second-quarter revenue, respectively.
HPE's server sales accelerated significantly in the second quarter of fiscal 2024 as more companies upgraded their servers to process more demanding artificial intelligence (AI) workloads. During the conference call, CEO Antonio Neri said, "As we capitalize on the AI growth opportunity, we also see indications of the market recovery in traditional and cloud infrastructure markets." Neri said that recovery was being driven by the enterprise public sector and small and medium-size businesses (SMBs) in North America and Europe.
The growth of HPE's server business also offset the declines of its intelligent edge and hybrid cloud businesses, which both faced tougher comparisons to the previous year. However, the AI-driven shift from its higher-margin intelligent edge revenue to its lower-margin server revenue reduced its gross margin. An unfavorable mix of lower-margin revenue within its hybrid cloud business exacerbated that pressure.
NYSE: HPE
Key Data Points
What will happen to HPE over the next year?
HPE expects its revenue to rise 6% to 11% year over year in the third quarter and 1% to 3% in constant currency terms for the full year. That's slightly higher than its prior full-year forecast for 0% to 2% constant currency revenue growth.
It expects its adjusted EPS to dip 2% to 12% year over year in the third quarter and decline 9% to 14% for the full year. That's also higher than its previous full-year outlook for an 11% to 15% adjusted EPS decline.
That stronger-than-expected guidance suggests that HPE's cyclical slowdown is ending, and that AI-driven sales of its newer servers will consistently offset the weakness of its other businesses. But that shift will continue to compress its near-term gross margin, and it still faces stiff competition from comparable server makers like Dell Technologies and dedicated AI server makers like Super Micro Computer.
HPE expects its margins to stabilize by the end of the year as its other higher-margin businesses recover. Analysts expect its reported revenue to stay roughly flat this year as its adjusted EPS declines 13%. But in fiscal 2025, they expect its revenue and adjusted EPS to grow 4% and 9%, respectively, as the macro environment improves.
That's a bright outlook for a stock that trades at just 11 times forward earnings while paying a forward dividend yield of 2.7%. That low valuation and high yield should limit its downside potential as its core business gradually recovers.
Where will HPE's stock be in a year?
HPE's stock still looks cheap after its post-earnings rally, and it could head higher as the macro headwinds dissipate, interest rates decline, and investors pivot back toward cheap dividend stocks. It certainly won't blast off like other AI-driven stocks over the next 12 months, but it should steadily climb higher as it pays out stable dividends.
