Hewlett Packard Enterprise (HPE) shares took a significant dive in early trading on Thursday after the company unveiled its fiscal third-quarter results. The earnings report came amidst a flurry of activity during the current earnings season. While the company beat revenue expectations, there were some key takeaways from analysts that caused investor unease.
Analyst Matthew Sheerin, maintaining a Buy rating and a $22 price target, highlighted that HPE’s July quarter sales reached $7.71 billion, representing a 10.1% year-on-year increase and surpassing the consensus estimate of $7.67 billion. Sheerin attributed this strong performance to robust demand for AI servers, which saw a 39% sequential growth. However, the higher mix of AI servers also led to a gross margin of 31.8%, falling short of expectations. Sheerin noted that overall server sales grew by a substantial 35.1% year-over-year, offsetting softer demand in the Hybrid Cloud (-6.9% year-on-year) and Intelligent Edge segments (-23.0% year-on-year), although both units showed sequential growth. HPE management projected fourth-quarter sales in the range of $8.1 billion to $8.4 billion and earnings per share between 52 and 57 cents.
Analyst Samik Chatterjee expressed concerns about the company’s second-quarter gross margin, suggesting it could signal heightened competition and aggressive pricing in the AI server market. However, Chatterjee acknowledged that HPE’s execution surpassed its peers, with strong cost discipline enabling the company to achieve its Server segment margin goals despite the higher mix of AI Server revenues. The analyst underscored the acceleration of HPE’s AI orders, indicating a positive outlook for its presence in the AI Server market, particularly with large data center customers. Chatterjee believes that AI demand coupled with cyclical recovery in traditional servers, storage, and networking presents a positive trajectory for HPE’s revenue performance in the medium term.
As of Thursday’s trading, shares of Hewlett Packard Enterprise had declined by 6.50% to $17.55.
