Hewlett Packard Enterprise Co (HPE) has certainly pulled off a nice run. Since mid-January, HPE stock has gained a sizzling 50%-plus. In fact, HPE stock is now hovering around its all-time high.
Part of the reason for the rally is that, well, the valuation had gotten dirt cheap, especially with the grueling correction in the tech sector.
But at the same time, there have been encouraging signs of traction with the spinoff from parent corporation, HP Inc (HPQ), which happened in November.
Now HPE is focused mostly on server and storage technologies, while HP will continue to sell PCs and printers.
All great, right? Definitely. Yet, is HPE stock still a good play here for investors? Or should there now be caution? To see, let’s take a look at the pros and cons.
HPE Stock Pros
Focus: In the Q1 earnings call for Hewlett Packard Enterprise, CEO Meg Whitman set forth the key advantages of the spinoff, such as improved focus and agility. But there should also be better alignment with employees since compensation will be more directly tied to the success of the company (not diluted by many other non-core divisions, which are now a part of HP).
But interestingly enough, Whitman has gone on to double down on her strategy to slim down the operations. To this end, she recently announced the spinoff of its services division to Computer Sciences Corporation (CSC). In other words, HPE will now become a pure-play tech operator, which should mean higher margins and perhaps better growth.
Partnerships and R&D: While acquisitions can be a driver for the top line, there are still risks. Let’s face it, the costs can be high and there also could be complications with integration. So why not instead focus on partnerships? Well, this appears to be the case with Hewlett Packard Enterprise. In fact, the company has some major leverage points, such as a global platform and extensive technology services. Because of such things, Dropbox recently signed a strategic relationship with HPE. Interestingly enough, Dropbox also indicated that it will save considerable money over time.
But of course, HPE has a tremendous engineering team as well. So it should be no surprise that the company continues to innovate. For example, HPE recently launched its platform for the Internet-of-Things, which is an emerging category for using data to improve the performance of cars, household appliances and so on. Oh, and today the company also struck a deal for this technology with General Electric Company (GE).
The Cloud: HPE is one of the few companies that has both the software and hardware to create public, private or hybrid clouds. Thus, the company has the right tools to fit the needs of just about any major customer.
This is important since the cloud is likely to be a key long-term growth driver. After all, just look at how this business has positively impacted the results of companies like Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT). In terms of the market potential, it is definitely enormous. Consider that Statistica forecasts that the public cloud infrastructure market will jump from $38 billion in 2016 to $173 billion by 2026.
HPE Stock Cons
Financial Engineering: Even though there should be clear benefits to the spinoffs, investors should still be wary. After all, these financial moves are extremely complicated and could be distracting, allowing for competitors to capitalize on the situation. There also could be nervousness with customers, as they may wait until the transactions are complete and there are clear signs of stability.
Already analysts are starting to get worried. For example, Rob Enderle (who operates the Enderle Group) has noted:
“You cut two large components of the company you said you weren’t going to cut: the PC business and now services. There was no indication they would cut off services. Are they going to cut off storage next? … Where do they stop cutting?”
Valuation: HPE stock is not necessarily a bargain anymore. Keep in mind that HPE trades at about 16 times earnings. By comparison, International Business Machines Corp. (IBM) trades at 12 times and Oracle Corporation (ORCL) has a multiple of about 19 times. Besides, the consensus price target on HPE stock is about $20, or about 5% higher than the current stock price of $19.
Growth Issues: In the latest quarter, HPE posted a mere 1.3% increase in revenues, and the company faces intense competition. With its cloud business, there are rivals like Microsoft and Amazon. Oh, and with the storage segment, HPE must fight against operators like IBM, NetApp Inc. (NTAP) and EMC Corporation (EMC). Indeed, there are more signs that the U.S. economy is slowing down, as noted by economists at firms like Barclays PLC (ADR) (BCS), JPMorgan Chase & Co. (JPM) and Deutsche Bank AG (USA) (DB). So if there is a recession, it’s inevitable there will be a material pullback in IT spending.
Bottom Line on HPE Stock
Since joining Hewlett-Packard in 2011, Whitman has done a tremendous job in restructuring operations. And as for HPE, the company is certainly more focused, has been striking important partnerships and is going after growth markets like cloud computing and IoT.
However, there are still some nagging issues. Just some include the complexities of the financial engineering and the fiercely competitive environment. Besides, the valuation is not necessarily cheap anymore — especially in light of the lackluster revenue growth — and the dividend is at a paltry 1.2%.
OK then, so should you buy HPE stock?
No — it seems that the easy gains are probably over.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
