Hewlett Packard Enterprise Co (NYSE:HPE) surged by about 10% as the company beat earnings expectations. Double-digit growth and an increase in guidance bolstered confidence in Hewlett Packard stock.
However, competitor pressures have increased, and the company acknowledges slowing revenue growth. As its future becomes more uncertain, HPE stock faces stagnation unless and until its new CEO can reinvent Hewlett Packard Enterprise.
Hewlett Packard Stock Beat Estimates
The Palo Alto-based provider of tech solutions reported Q1 2018 earnings of 34 cents per share. Analysts had been looking for 22 cents per share. The company earned 16 cents per share in Q1 2017. Revenues of $7.7 billion also beat expectations by $630 million.
This represents an increase of 11.6% from Q1 2017 numbers. The company also raised full-year guidance to the range of $1.35 to $1.45 per share. This sent share moving higher by about 10% in Friday trading, as consensus estimates had placed 2018 earnings at $1.18 per share.
HPE Changes Leadership
Founded in 2015 with the split of the old Hewlett-Packard company, HPE focuses on information technology (IT) and financial services. It also became a separate company from the PC and printing business, which now operates as HP Inc (NYSE:HPQ).
The company also faces changes after long-time CEO Meg Whitman stepped down this month. It was Whitman who decided to split Hewlett-Packard’s divisions into two companies. Since the split, Hewlett Packard stock has risen by nearly 60%. It remains too early to tell how new CEO Antonio Neri will change the company.
However, signs that Neri will continue the restructuring started by Whitman reassures investors. Neri also increased the dividend by 50%, which will take effect in the 3rd quarter of this year.
Little doubt exists that competitive pressures weigh on Hewlett Packard stock. The stock trades at a reasonable 14 forward price-to-earnings (PE) ratio. This places HPE’s PE well-below S&P 500 averages, and well below tech companies which trade at cloud-level PE ratios.
And speaking of the cloud, competition from the cloud weighs on Hewlett Packard stock.
As our own Tom Taulli pointed out, companies such as Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have helped companies outsource their IT infrastructure to the cloud.
International Business Machines Corp. (NYSE:IBM), Cisco Systems, Inc. (NASDAQ:CSCO), and Dell Technologies Inc (NYSE:DVMT) place further competitive pressure on Hewlett Packard Enterprise stock.
Hewlett Packard Stock Needs a Catalyst
Despite the pressures, the company reported substantial revenue gains for its respective divisions. Hybrid IT, its largest division, saw revenue increases of 10%. Intelligent Edge and Financial Services rose 9% and 8% respectively. However, revenue growth is expected to slow down.
The company reiterated its long-term outlook for 0% to 1% organic revenue growth. Restructuring should increase profits as costs go down, but companies can only cut costs so far.
Despite being newly-formed, one must view HPE as an old company, comparable to IBM and Microsoft. What’s happening to HPE is the same challenge that the likes of Microsoft and IBM faced —they must reinvent themselves once their core offering falls out of favor.
IBM has accomplished this by becoming a blockchain company, as well as an HPE competitor. Microsoft has become another competitor as focus shifts from operating systems to cloud servers. To stay relevant and grow the Hewlett Packard stock price, Mr. Neri must achieve the same type of reinvention.
Investors should watch the company to see if they find this new path and invest accordingly.
The Bottom Line on Hewlett Packard Stock
Technological change is forcing HPE to reinvent itself, and how the new CEO manages this will determine the future of Hewlett Packard Enterprise stock. HPE impressed Wall Street by beating estimates and raising guidance. Still, the company enjoyed one-time gains that will not benefit HPE in the future.
With slow-growth occurring in the foreseeable future, this company appears short on growth options. Mr. Neri faces the monumental task of finding a new growth niche for his company. If HPE can achieve higher growth, its current low multiple could turn HPE stock into a profitable investment.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
