The most recent earnings report from Hewlett Packard Enterprise Co (NYSE:HPE) was encouraging. Then again, Wall Street’s expectations were fairly downbeat, if not grim. Yet HPE stock was able to show that it can grow the top-line, with revenues up 11% to $7.7 billion.
Keep in mind the consensus was for only $7.07 billion. So yes, it was a big-time beat.
HPE saw growth in areas like storage, which rose by 24%, and DC networking, up 27%. Note that the analysts’ consensus was for there to be declines!
The performance on the bottom line was also solid. Profits came to $1.44 billion, or 89 cents a share, up from $267 million, or 16 cents a share in the same period a year ago.
A Closer Look at HPE Stock
Based on these numbers, HPE stock jumped 10%. However, since then, the enthusiasm has waned somewhat. It’s true that part of this has been due to the overall volatility with tech stocks. Even the growth companies, like salesforce.com, inc. (NYSE:CRM), have felt the pressures.
But when it comes to HPE stock, I still think there some deeper issues. One is that the company has had to deal with considerable disruption because of the spin-off of HP Inc (NYSE:HPQ) and the ongoing restructuring. Such moves can weigh on productivity and responsiveness to tech trends.
Yet doesn’t the latest quarter demonstrate that the company can grow? This is true. But the results need to be taken with a grain of salt. When it comes to enterprise technology, a few deals can have a major impact on the revenue line.
Besides, as for fiscal Q1, the year-over-year comparisons were quite favorable and there were one-time impacts from some notable acquisitions, such as for Nimble and SimpliVity.
But perhaps the biggest issue for HP is the potential disruption from the secular trend to the cloud. Simply put, it means less demand for its servers, which account for 40%+ of revenues.
Mega tech operators like Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL) continue to grow a robust rates because customers continue to outsource their IT infrastructures to the cloud.
The benefits are definitely compelling, in terms of the lower costs, easier management and richer analytics.
There are also software companies, such as VMware, Inc. (NYSE:VMW) and Nutanix Inc (NASDAQ:NTNX), that allow for much more affordable private cloud solutions. They are generally easier to setup and rely on commodity hardware.
In light of all this, it should be no surprise that HPE has struggled with finding new business. Last year, the revenues dropped by nearly 5% and they were off about 4% in the prior year.
Bottom Line on Hewlett Packard Stock
Legacy tech operators can definitely find ways to turn things around. Just look at the success of MSFT and Adobe Systems Incorporated (NASDAQ:ADBE).
But it’s not easy. This is especially the case when there are wrenching changes. And I think this is the predicament for HPE stock. For the most part, the company has not set forth a convincing strategy to find new paths to growth.
Now this is not to imply that HPE stock will implode. After all, the company plans to increase the dividend by 50% and ramp its buybacks.
However, these are the kinds of actions you would see from a company that is focused mostly on the short-term – not on making big bets on new technologies.
Tom Taulli is 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.
