Hewlett Packard Enterprise (HPE) has witnessed an impressive 41.1% increase year to date (YTD). This performance has outshined the returns of the Zacks Computer – Integrated Systems industry, which stands at 16.6%. HPE’s stock has also outperformed competitors, including Micron (MU), Seagate Technology (STX), and Advanced Micro Devices (AMD).
Strong Performance in Context
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Even with this robust performance, HPE’s price-to-earnings (P/E) ratio is lower than the industry average. This raises an important question: Should investors buy, sell, or hold the stock? Although the discounted valuation might seem enticing, a deep dive into HPE’s finances and market conditions suggests significant challenges ahead. Currently, a cautious decision to sell seems more reasonable.
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A Look at HPE’s Significant Growth
The growth of Hewlett Packard Enterprise this year can largely be attributed to key areas such as GreenLake and AI systems. HPE GreenLake is seeing remarkable adoption as companies appreciate the flexibility and scalability it offers for IT transformation.
In the fourth quarter of fiscal 2024, GreenLake’s customer count rose nearly 34.5% year over year, reaching 39,000 customers. This expansion has contributed to an annualized revenue rate of over $1.9 billion, reflecting a 48% year-over-year increase.
The demand for HPE’s AI systems remains strong as well. HPE announced that orders for AI products and services have accumulated to $6.7 billion since the first quarter of fiscal 2023. New AI orders in the fourth quarter increased the backlog to a total value of $3.5 billion.
Despite the positive metrics, much of this growth is already reflected in the stock price, which has risen 41% YTD. The stock’s valuation may not be as attractive as it initially appears, especially with limited short-term catalysts and rising competition.
Challenges Ahead for HPE
While HPE is capitalizing on the AI sector, it is also dealing with challenges. The Intelligent Edge division, for instance, faces issues due to high inventory levels among customers. In the fourth quarter of fiscal 2024, revenues in this segment fell 20% year over year. Demand for HPE’s switching and campus solutions has also softened.
Additionally, HPE’s gross margin has come under pressure. The non-GAAP gross margin contracted by 390 basis points year over year and 90 basis points quarter over quarter, landing at 30.9% in the latest quarter due to low-margin revenues in the Intelligent Edge division.
The financial services segment is not faring much better, with revenues of $893 million showing a modest 2% year-over-year growth in the last quarter. The overall decline in performance can be linked to a slowdown in IT spending.
High interest rates and inflation are limiting consumer spending. Meanwhile, companies are delaying substantial IT investments, reflecting concerns about the global economy and ongoing geopolitical challenges.
Looking ahead, the Zacks Consensus Estimate for HPE does not indicate a speedy recovery in the near future for either the top or bottom lines.
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What Actions Should Investors Consider?
In 2024, HPE has displayed considerable growth, particularly in AI systems and hybrid cloud offerings. However, multiple challenges are creating volatility for the stock.
Investors might benefit from selling HPE stock now to secure gains from this year’s rally while avoiding potential risks. Currently, Hewlett Packard Enterprise has a Zacks Rank #4 (Sell).
You can view the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report
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