Hewlett Packard Enterprise (NYSE:HPE) recently revealed its Q2 fiscal 2025 results (the fiscal year concludes in October), slightly surpassing analyst forecasts. The firm announced earnings of $0.38 per share on revenues of $7.6 billion, exceeding consensus predictions of $0.33 and $7.5 billion, respectively. Even with this favorable result, HPE’s stock largely stayed around $18. As an aside, see: Time To Buy Amazon Stock?
This inertia can be partially ascribed to the company revising its full-year revenue growth outlook to 7% to 9%, a reduction from its earlier estimate of 7% to 11%. If you’re seeking consistent returns, you may want to examine diversified investment avenues such as the Trefis High Quality portfolio, which has demonstrated exceptional performance, achieving returns of over 91% since its inception. Additionally, see – RGTI Stock: What’s Next After An 1,100% Rally?
Valuation Perspective
Considering HPE’s latest performance, you may be questioning whether it’s a wise investment right now. From a valuation standpoint, we believe HPE stock seems to have potential for growth. Priced at roughly $18 per share, it is valued at 0.7 times its trailing revenues. This is slightly lower than its three-year average price-to-sales (P/S) ratio of 0.8 times.
Although a decline in valuation multiples might seem warranted by the company’s average revenue growth of only 3% over the past three years and a drop in its net income margin from a three-year average of 6% to the current 4%, this doesn’t capture the entire picture.
Strong Q2 Performance and Future Growth Drivers
HPE’s Q2 results exhibited year-over-year revenue growth of 6%. Its Annualized Revenue Run Rate (ARR) surged by 46% to $2.2 billion, fueled by a robust 13% increase in hybrid cloud revenue, a 7% rise in intelligent edge segment sales, and a 6% increment in server revenue.
While the adjusted gross margin fell by 370 basis points year-over-year to 29.4%, HPE’s net income was significantly affected by a non-cash impairment charge of $1.4 billion for legacy goodwill, leading to a GAAP loss of $0.82 per share. However, on an adjusted basis, HPE posted earnings of $0.38 per share, reflecting a slight decrease from $0.42 in the same quarter of the previous year. Looking forward, HPE’s Q3 revenue forecast of $8.2 billion to $8.5 billion also surpassed the consensus prediction of $8.17 billion.
Building on the valuation discussion, HPE is currently experiencing a growth rate faster than it has for the previous three years. Analysts anticipate sales to increase by 8% this year and an additional 6% the following year. This upward trajectory of growth suggests that an increase in valuation multiples is justified. Notably, the average price target set by analysts for HPE is $21, reflecting an upside potential of over 15%. This target corresponds to a 0.9 P/S ratio, in contrast to the current 0.7x and the three-year average of 0.8x.
What’s Driving HPE’s Growth?
HPE’s strategic priority lies in its edge-to-cloud platform transition, especially leveraging its GreenLake hybrid cloud solution. This strategy is designed to capture recurring income through flexible consumption models that effortlessly connect on-premises with cloud environments. The company’s strategic pivot towards edge, hybrid cloud, and AI delivered via the HPE GreenLake platform is yielding success. Moreover, HPE’s alliance with NVIDIA for integrated AI computing solutions places it in a competitive position against hyperscaler-driven alternatives by providing enterprise clients with on-premises and edge deployment flexibility. On another note, take a look at – Is CRWD Stock Overvalued At $460?
Risks to Consider
While the valuation of HPE stock seems to present an opportunity for growth, it is essential to factor in potential risks. Historically, HPE’s stock has underperformed the broader market during economic recessions. For example, it dropped by 32% from its peak amid the 2022 inflation shock, compared to a 25% decrease for the S&P 500. Similarly, during the COVID-19 market correction in 2020, it plummeted by 52% against a 34% drop for the S&P 500. This pattern implies that HPE stock is more susceptible to adverse macroeconomic conditions. See – Buy or Sell HPE Stock – for further details.
You may consider purchasing HPE stock in the current downturn, but remember that investing in a single stock, no matter how promising, carries risks. If you wish to mitigate that risk while benefiting from substantial upside, consider the High Quality portfolio, which has outperformed the S&P 500 and generated returns exceeding 91% since its inception. Why is that? As a collective, HQ Portfolio stocks have yielded better returns with lower risk compared to the benchmark index; offering a smoother investment journey, as shown in HQ Portfolio performance metrics.