On Wednesday, Evercore ISI reaffirmed its In Line rating for HP (NYSE:HPQ) Enterprise (NYSE:HPE), maintaining a $22.00 price target on the stock. The decision follows HP Enterprise's release of its April-quarter earnings, which surpassed expectations, especially in the area of Artificial Intelligence (AI).
HP Enterprise reported significant growth in AI shipments, increasing from approximately $400 million last quarter to about $900 million in the April quarter. The company has also expressed growing optimism about future AI opportunities, noting increasing demand from sovereign and enterprise customers, and success with its GreenLake AI offering, which was the fastest-growing segment of Annual Recurring Revenue (ARR) for the quarter.
Despite the competitive landscape where others have seen margins shrink, HP Enterprise's server margins have remained relatively stable, albeit lower than previous quarters and the same period last year. This has been attributed to the company's effective self-help initiatives, including operational expenditure savings.
HP Enterprise's April-quarter results showed revenues of $7.2 billion with earnings per share of 42 cents, exceeding the street's expectations of $6.82 billion and 39 cents. This revenue increase of 3% year-over-year was largely driven by a strong server segment, which saw an 18% increase, propelled by accelerated AI demand and a rebound in x86 compute.
Still, this growth was partially offset by declines in other areas, with Hybrid Cloud and Edge computing revenues falling by 8% and 19% year-over-year, respectively. The Edge computing segment is currently experiencing a period of inventory digestion, but management anticipates this to be the lowest point, with sequential improvements expected in the second half of the year, particularly supported by strength in the state, local, and education sectors in the U.S.
Furthermore, AI system order conversions have been robust, with orders growing quarter-over-quarter to $600 million during the April quarter, including $900 million in AI system shipments. The backlog now stands at $3.1 billion. Additionally, the company has managed to reduce the lead times for H100 GPUs to a comfortable range of 6-12 weeks.
Reflecting the positive inflection in AI demand and shipments, along with a recovery in the core business and prudent operational decisions, management has raised its full-year 2024 sales growth guidance to 1-3% in constant currency, up from the previous range of 0-2%. Earnings per share (EPS) guidance has also been increased to $1.85-1.95, up from the prior forecast of $1.82-1.92.
Free Cash Flow (FCF) is still projected to be at least $1.9 billion. Despite these positive trends, Evercore ISI has chosen to maintain its In Line rating and $22 price target for HP Enterprise.
In other recent news, Hewlett Packard Enterprise (NYSE:HPE) has been making significant strides in the artificial intelligence (AI) systems market. The company's revenue from AI systems more than doubled in the second fiscal quarter of 2024, reaching approximately $900 million. These strong results led to raised full-year revenue and earnings guidance, with a projected revenue between $7.4 billion and $7.8 billion for the third quarter.
Analysts from Bernstein suggest that the robust demand for AI-optimized servers could indicate a period of increased shipments for HPE in the upcoming quarters. In response to HPE's performance, Susquehanna and Wells Fargo (NYSE:WFC) both raised their price targets for the company's shares to $20 and $22 respectively.
Despite these positive developments, HPE faces potential challenges in its product lineup according to Susquehanna's analysis, which might allow competitors such as NTAP and Dell (NYSE:DELL) to consolidate their positions in the AI supply chain.
Furthermore, Dell recently announced potential shortfalls in its current-quarter profit due to higher costs associated with building AI servers. These are recent developments in the AI systems market, which investors should consider.
InvestingPro Insights
InvestingPro data provides a deeper look into HP Enterprise's financial health and market performance. With a market capitalization of $25.61 billion and a current P/E ratio of 14.14, HP Enterprise is demonstrating a solid stance in the market. Notably, the company's adjusted P/E ratio for the last twelve months as of Q1 2024 stands at an even more attractive 10.32. This is complemented by a PEG Ratio of 0.1 during the same period, indicating potential for growth at a reasonable price.
One of the key InvestingPro Tips highlights HP Enterprise as a company with a strong free cash flow yield, which aligns with management's projection of at least $1.9 billion in free cash flow. Additionally, the tip pointing out that the stock generally trades with low price volatility adds a layer of confidence for investors looking for stable returns. Moreover, HP Enterprise has maintained dividend payments for 10 consecutive years, with a current dividend yield of 2.95%, showcasing its commitment to shareholder value.
For those interested in gaining further insights, InvestingPro offers additional tips on HP Enterprise, which can be accessed at: https://www.investing.com/pro/HPE. Readers can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking more valuable investment information.
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