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HP Enterprise's (HPE) rose about 4% premarket on Thursday after Evercore added the shares to its TAP (Tactical, Action, Positioning) list with an Outperform rating, ahead of the company's second-quarter results on June 4.
Analysts led by Amit Daryanani noted they expect April-quarter results to have both positives and negatives. On the positive side, AI revenues/backlog will do better versus expected, on the negative side they see risk to estimates and think HPE will report the quarter modestly below street expectations for sales/EPS of $6.83B/$0.39 – street is modeling the quarter's sales to rise 1.2% sequentially, versus the typical seasonality of a 6.3% decline.
Headwinds in networking should be offset by better trends in compute, however, the real catalyst will be upside to AI expectations both on revenues and backlog numbers which should help change the narrative around HP Enterprise, the analysts added.
Weakness in networking could potentially create risk to the fiscal 2024 guidance, driven mainly by ongoing demand weakness and customer inventory digestion for campus networking products, the analysts added.
In addition, their checks suggest potential share loss in the Edge business versus peers due to uncertainty around the product portfolio and the potential integration effort required following the acquisition of Juniper Networks (JNPR). A sizable offset could be accelerating demand for AI, mainly as lead times for H100s continues to come in (about 8 to 12 weeks versus 26+ weeks last quarter).
The timing of revenue received from AI, given the mix of products (capex) and GreenLake (pay-as-you-go) within HP Enterprise's AI backlog of $3.0B last quarter is of utmost importance, the analysts said.
The analysts think that the company's AI story is better compared to what's priced into the stock, though HPE will need to execute against their AI opportunity before investors start to fully credit the company.
Investors will also be interested in any updates to the timing of the close of the H3C divestiture, and any updates on the pending acquisition of Juniper, according to the analysts.
Daryanani and his team noted that persisting weakness in networking demand, along with potential share loss, presents a less favorable setup in the April-quarter and for the remainder of FY24.
The analysts revised their FY24 estimates, lowering topline growth from +0.5% year-over-year ($29.27B) to -0.5% year-over-year ($29B). On the other hand, AI upside could act as an offset, mainly as GPU allocation improves. Beyond this, they remain focused on updates on the pending Juniper acquisition.
HP Enterprise (HPE) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. The Seeking Alpha authors' average rating, and the average Wall Street analysts' rating, is also Hold.
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