AI And Juniper Integration Will Transform Operations

Key Takeaways

• Growth in AI systems and GreenLake Cloud platform promises substantial long-term revenue gains and margin improvement through elevated recurring services.
  
• Strategic acquisitions and cost reductions could enhance operating profits and net margins, strengthening market competitiveness and aligning with the business strategy.
  
• Potential acquisition block, tariffs, pricing competition, inventory challenges, and workforce reductions pose risks to HPE's revenue growth and profitability.

Catalysts

Provides solutions that allow customers to capture, analyze, and act upon data seamlessly in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan.

• Hewlett Packard Enterprise expects significant growth from its AI systems business, with anticipated higher AI revenue conversion in the second half of 2025, potentially driving a major boost in revenue and earnings.
  
• The proposed acquisition of Juniper Networks is anticipated to deliver at least $450 million in gross annual run rate synergies within three years, which could increase operating profits if the acquisition closes as expected.
  
• HPE's GreenLake Cloud platform shows strong potential, with annual recurring revenue surpassing $2 billion, up 46% year-over-year, which supports long-term revenue growth and margin improvement through higher-margin recurring services.
  
• Cost reduction initiatives, including a planned 5% reduction in the workforce, are expected to align HPE’s cost structure to its business mix and long-term strategy, resulting in an expected $350 million in gross annual run rate savings by fiscal 2027, enhancing net margins.
  
• The introduction of new technologies like HPE Alletra MP and integration of AI capabilities are driving demand, with triple-digit year-over-year order growth observed in the storage segment, suggesting positive revenue impacts and strengthening market positioning.

Hewlett Packard Enterprise Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Hewlett Packard Enterprise compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Hewlett Packard Enterprise's revenue will grow by 13.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.3% today to 9.8% in 3 years time.
• The bullish analysts expect earnings to reach $4.5 billion (and earnings per share of $3.09) by about July 2028, up from $1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 19.5x today. This future PE is lower than the current PE for the US Tech industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.54%, as per the Simply Wall St company report.

Hewlett Packard Enterprise Future Earnings Per Share Growth

Risks

• The Department of Justice is seeking to block HPE's proposed acquisition of Juniper Networks, which could limit the company's ability to realize the anticipated $450 million in synergies, potentially affecting future revenue growth and earnings.
  
• The U.S. administration's tariffs on imports, particularly from China, pose a risk to HPE's supply chain and cost structure, potentially leading to higher costs that could compress operating margins and impact net earnings.
  
• HPE’s Server operating margins are under pressure due to pricing competition and challenges with inventory valuation, which could result in reduced profitability if not adequately addressed.
  
• Higher-than-normal AI inventory and the rapid transition to next-generation GPUs might lead to inventory write-downs or increased working capital, negatively impacting free cash flow and net earnings.
  
• Workforce reductions as a cost-saving measure could lead to potential disruptions in operations or morale issues, which might affect productivity and long-term revenue growth.

Valuation

• The assumed bullish price target for Hewlett Packard Enterprise is $30.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hewlett Packard Enterprise's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $16.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $46.0 billion, earnings will come to $4.5 billion, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 9.5%.
• Given the current share price of $20.41, the bullish analyst price target of $30.0 is 32.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.