To The Moon

$Hewlett Packard Enterprise(HPE)$

The stock dropped 16% in Friday morning trading following a mixed Q1 2025 earnings report. The enterprise IT company, distinct from its more well-known counterpart HPQ, posted revenue of $7.85 billion, slightly surpassing the forecast of just over $7.8 billion. However, earnings per share slipped to $0.49, missing the consensus estimate of $0.50 by a penny.

Despite a 17% year-over-year revenue growth and strong performance in artificial intelligence—highlighted by $1.6 billion in net orders and a 40% increase in enterprise AI orders—weak margins led to the sell-off. Gross margins fell 720 basis points to 29.2% from 31.8%, and while GAAP earnings surged by 52%, GAAP profit still came in at $0.44, trailing non-GAAP expectations.

Additionally, the company reported negative free cash flow of $877 million, which is far from reflective of sustainable earnings quality. The disappointing 2025 guidance has caused investors to reassess their outlook on this crucial Enterprise IT provider.

Earning Overview

​Hewlett Packard Enterprise (HPE) reported its fiscal first quarter 2025 results on March 6, 2025. The company achieved its fourth consecutive quarter of year-over-year revenue growth, with revenue increasing by double digits in Q1. ​ However, HPE faced challenges during the quarter, including execution issues in its server business and the impact of tariffs. In response, the company announced a cost-reduction program aimed at reducing structural operating costs and advancing its commitment to profitable growth. This program includes a workforce reduction of approximately 5%, equating to around 2,500 positions, over the next 12 to 18 months.

Fundamental Analysis

Additionally, HPE's proposed acquisition of Juniper Networks is currently facing legal challenges from the U.S. Department of Justice, with a trial set to commence on July 9, 2025. Following the earnings announcement and these developments, HPE's stock experienced a decline, reflecting investor concerns over the company's outlook and restructuring efforts.

Outlook

Financial Performance: In Q1 2025, HPE reported revenue of $7.9 billion, marking a 16% year-over-year increase. Cost-Cutting Measures: HPE plans to eliminate approximately 3,000 jobs, aiming to save $350 million by fiscal 2027. ​The company projects earnings per share (EPS) between $1.70 and $1.90 for the fiscal year ending October 2025, below analysts' expectations of $2.12

Guidance

Many investors were caught off guard by the results. While the company met its financial commitments—delivering 17% year-over-year revenue growth and aligning non-GAAP EPS with previous guidance—server operating margins fell short of expectations. The shortfall was attributed to aggressive discounting in the x86 server market, inventory valuation misalignment, and excess AI-related inventory.

Neri also addressed competitive pricing pressures, ongoing cost-saving measures, and the impact of tariffs. The company has implemented a 5% workforce reduction and is proceeding with its $450 million cost synergy plan related to the Juniper acquisition, despite legal challenges. The DOJ has filed a lawsuit to block the deal, with a trial scheduled for July 9th. Neri remains optimistic that the transaction is pro-competitive and crucial for national security.

Despite the challenges, HPE expects to normalize server operating margins by Q4 and continues to focus on innovation across AI, hybrid cloud, and networking.

Inventory

Hewlett Packard Enterprise (HPE) faced significant inventory issues during its recent financial performance, particularly affecting its server and AI-related products. Some key factors contributing to these challenges include:

Inventory Valuation Misalignment: HPE found that the valuation of its inventory was not aligned with its pricing strategy. This discrepancy was discovered late in the quarter, leading to operational inefficiencies and contributing to weaker-than-expected margins.

Higher-than-Expected AI Inventory: As demand for AI products surged, HPE faced an overstock of certain AI-related components, such as GPUs (Graphics Processing Units), including Hopper models. This excess inventory was in response to the growing interest from service providers and model builders racing to incorporate the latest technologies for AI.

Execution Challenges: The company noted that aggressive discounting in its traditional x86 server business, combined with the pricing misalignments, further exacerbated inventory and margin issues. This situation led to a reduction in profitability during the quarter.

Impact on Margins: These inventory and pricing issues were key factors contributing to a significant decline in HPE's gross margins, which dropped by 720 basis points year-over-year, falling to 29.2%.

HPE is actively addressing these issues, including revising pricing strategies and aligning inventory with demand. However, it will take one to two quarters for the full impact of these actions to materialize, and the company expects margins to normalize by Q4 2025.

Free Cash Flow

(HPE) reported negative free cash flow of $877 million for Q1 2025, which raised concerns about its ability to generate sustainable cash flows. This negative cash flow is particularly troubling as it indicates a shortfall in the company’s operating cash generation, which could affect its ability to invest in growth initiatives, pay dividends, or reduce debt.

Although HPE posted strong revenue growth (17% YoY), weak margins—particularly in its server and AI segments—exacerbated the company's cash flow issues, as it couldn't convert as much of its revenue into cash.

Risks and Challenges

Operational Challenges Despite robust revenue growth, HPE faced several operational issues impacting profitability:

Server Operating Margins: The company encountered aggressive discounting in the traditional x86 server market, leading to lower margins.​

Inventory Valuation: Misalignment between inventory valuation and pricing strategies was identified late in the quarter, affecting financial outcomes.​

AI Inventory: Higher-than-normal inventory levels related to AI components, such as Nvidia's Hopper GPUs, were noted. Customers are transitioning to newer technologies like Nvidia's Blackwell platform, influencing inventory dynamics.

The company faces profitability concerns due to new U.S. tariffs on imports from Mexico and China, which are expected to impact server sales and overall margins.

Cost-Reduction Measures:

In response to these challenges, HPE announced a workforce reduction of approximately 2,500 employees, representing about 5% of its global staff, over the next 12 to 18 months. This initiative aims to achieve $350 million in savings by fiscal year 2027. The company will incur charges totaling $350 million related to this program, with $250 million expected in fiscal 2025 and $100 million in fiscal 2026.

Dividend Yield:

HPE offers a dividend yield of approximately 2-3%, which is relatively attractive compared to other tech companies. This provides some stability and appeal to income-focused investors, even as the company faces challenges in growth and cash flow.

Valuation

HPE’s P/E ratio typically hovers around 12-15x, depending on market conditions and the company's earnings outlook. This is relatively low for a technology company, indicating that investors are pricing in concerns about the company's near-term profitability and margin pressures.

The P/S ratio for HPE is typically around 0.7x, reflecting the company's more modest growth profile compared to other tech giants. This suggests that HPE is trading at a discount relative to its sales, potentially due to concerns about its ability to maintain strong profit margins and its reliance on hardware sales in a competitive market.

HPE’s intrinsic value is estimated to be around $14.43 per share. This estimate will change significantly with updated inputs, including actual free cash flow numbers, current debt levels, and future growth expectations.

Market sentiment

Juniper Networks Acquisition:

The U.S. Department of Justice filed a lawsuit on January 30, 2025, to block HPE's proposed acquisition of Juniper Networks, citing competition concerns. The trial is scheduled to commence on July 9, 2025. HPE plans to vigorously contest the lawsuit, asserting that the merger would enhance competition and benefit customers.

Growth Concerns: Despite strong revenue growth in areas like AI and hybrid cloud, HPE’s lower-than-expected margins and negative cash flow are leading to a discounted valuation. The market has priced in risks related to its ability to scale its newer offerings while managing the legacy hardware business.

Growth Potential: HPE has opportunities in high-growth sectors like AI and hybrid cloud, but investors remain cautious due to its current execution issues. If HPE can address its operational challenges and maintain its market share in the AI and hybrid cloud segments, its valuation could improve in the future.

Peer Comparison: Compared to larger, faster-growing tech companies, HPE’s valuation is low, but that may reflect its more niche focus on enterprise IT solutions and its current execution struggles.

Conclusion

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub