Despite Earnings Beat, Long-Term Prospects Are Weak for Hewlett Packard Enterprise Co Stock

Hewlett Packard stock - Despite Earnings Beat, Long-Term Prospects Are Weak for Hewlett Packard Enterprise Co Stock

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Shares in Hewlett Packard Enterprise Co (NYSE:HPE) popped nearly 10% after earnings on Feb. 23 surprised analysts in a good way.

The first quarter under new CEO Anthony Neri saw profits of 34 cents per share, against expectations of 22 cents, and revenue of $7.67 billion, a huge beat on the $7.07 billion expected.

It was the top-line growth that was most impressive. Storage revenue was up 24% year-over-year, and networking revenue was up 27% YOY. Both were expected to be down. The company announced upbeat guidance for the next few quarters.

Hewlett Packard also announced it would bring in cash from overseas thanks to tax reform, with $7 billion in share repurchases and a 50% hike in the dividend starting later this year.

The problem is that this may be as good as it gets for Hewlett Packard stock, which is stuck between the rock of the cloud and the hard place of the client.

Out of the Woods?

The sale of Micro Focus for $8 billion cleans up one of the last messes of the previous era — the $11-billion purchase of Autonomy in 2011 — so Hewlett Packard can focus on the future.

The future for HPE lies in enterprise. The company is going to depend on big contracts, like a $57-million contract with the Department of Defense, for its growth.

The old Hewlett Packard failed to build its own cloud network, and the commitment of new CEO Neri to delivering returns to shareholders forecloses its chance to get back into that game, as Oracle Corporation (NYSE:ORCL) recently decided to do.

This leaves it competing in the area of “hybrid” cloud, trying to sell its data-center gear as systems compatible with leading cloud vendors. In announcing its new unit, HPE only introduced an “interim” head. Filling that opening with a superstar should have been Neri’s #1 job.

While the data center is merging into cloud, Hewlett Packard’s position is that the data center is not going away and that enterprises will still want to control some of their information technology infrastructure. Thus, its servers, storage systems, and networking boxes have a long runway of profit.

What’s left is a miniature version of IBM (NYSE:IBM), the last of the big iron vendors with one third of Big Blue’s sales and profitability.

In the near term, that’s enough to bring in buyers to Hewlett Packard stock, but it may not be enough to bring in a lot of investors. Most analysts following the company still have it rated as a hold, meaning they don’t know what to tell investors. The question remains whether HPE is just benefiting from a rising tide of tax reform and computing purchases raising all boats.

The Bottom Line for Hewlett Packard Stock

My own view of Hewlett Packard stock remains negative.

The problem is that the market HPE exists in, enterprise computing, is going to continue to be squeezed over time, by clouds from above and clients from below.

The enterprise space, as it has existed for decades, is becoming a niche. The mass markets for computing lie in the cloud and in the air. This is where the money is going to be made in the future.

In the cloud, HPE is competing against its own customers, companies like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) that can compete from the chip level on up. Hewlett Packard has no play at all in the consumer space — that all went to HP Inc (NYSE:HP) in the divorce.

What enterprises want right now are solutions, mainly software. That’s why companies like salesforce.com, inc. (NYSE:CRM) keep growing, and why Oracle remains alive.

If Hewlett Packard is still around in 2025, I’ll be surprised.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/despite-earnings-beat-long-term-prospects-are-weak-for-hewlett-packard-stock/.

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