Hewlett Packard Enterprise: Capitalize on Gains Thanks to Strong Server Growth (NYSE:HPE)

Hewlett Packard Enterprise (New York Stock Exchange: HPE) will report Q3 2024 earnings on September 4, 2024, with mixed opinions from analysts. Over the past 90 days, analysts have revised earnings per share up 7 times and down 5 times. Using Dell Technologies (DELL) Q2 2025 results as a guideHPE can achieve significant growth and margin expansion for its general computing servers and AI infrastructure. Given the strong demand in this space, coupled with flat demand for commercial endpoints, I believe HPE can achieve similar strength in Q3 2024. I will reiterate my BUY rating with an increased price target of $28.70/share to 6.7x EV/EBITDA.

For equation 3'24, I forecast revenue and earnings per share to be $7.9 billion and $0.52 per share, respectively. Consensus estimates for the same figures are $7.6 billion and $0.46 per share at the midpoint.

HPE Investment Thesis

HPE is one of the infrastructure aggregators competing for the market. sharing the infrastructure space of general computing servers and artificial intelligence servers. IDC predicts the server Spending in the market is set to grow at a compound annual growth rate (CAGR) of 12.3% over the next five years, driven by a shift in GPU server mix. The research firm forecasts this to be around $144 billion in 2024 and $157 billion in 2025 for x86 servers alone. Statista forecasts the AI ​​market to grow to $243 billion in H1 2025, up from $184 billion in H1 2024.

According to Bloomberg, 7,000 data centers They are being built worldwide. ABI Research forecasts a total of 5,697 public data centers available by the end of 2024, 511 of which will be hyperscale sites. Given the increasing adoption of AI/ML applications, supporting infrastructure must be in place to meet this demand. This will include GPU+CPU servers, Ethernet, and inevitably, endpoints.

Considering the positive growth data seen in Q2 2024, I have reason to believe that HPE will see a strong earnings print in the upcoming Q3 2024 report. Dell Technologies reported a strong Q2 2025 print on August 29, 2024, driven by sequential improvements in overall compute servers and strong demand for AI server infrastructure. I believe HPE will see similar results for its branded infrastructure in the upcoming quarterly print as enterprises and hyperscalers continue to build out their high-performance computing infrastructure to meet the execution requirements of AI/ML training and inference.

Advanced Micro Devices (AMD) and NVIDIA (NVDA) reported exceptionally strong growth for their GPUs, the MI300X and H100, respectively. Contrary to Super Micro Computer’s (SMCI) challenges in sourcing infrastructure for its server racks, I believe HPE is in a stronger position to source the necessary infrastructure without depressing margins. Dell Technologies reported strong operating margin expansion in its Q2 2025 results, growing from 52% in Q2 2024 to 63% in Q2 2025. This trend is likely to be followed in HPE’s earnings, given the similar market reach and product categories. On a sequential basis, I believe HPE’s server segment will grow 17% to reflect this strong growth in GPU + CPU demand. Given Nvidia’s customer mix of ~60/40 enterprise/hyperscaler sales, this could put HPE in a strong position for server margin expansion. In total, Nvidia’s revenue grew 122% in the June 2024 quarter, driven by GPU sales. AMD achieved similar growth: its data center segment grew 2.14x in the June 2024 quarter, also driven by GPU growth.

In addition to strong server growth, I anticipate HPE to achieve sequential growth in its intelligent edge segment driven by enterprise investments in networking equipment. Cisco Systems (CSCO) and Arista Networks (ANET) suggested that inventory digestion is behind the networking businesses and that sequential growth has returned. Cisco specifically suggested that campus networking equipment sales are strengthening as enterprises configure their networks to meet the bandwidth requirements to run production AI applications. If this translates to HPE’s networking equipment, it may result in sequential growth over the duration of fiscal 2024 for the infrastructure business and result in improved sales and operating margins alike. I am forecasting 7% sequential growth for the intelligent edge for Q3 2024 with 15% year-over-year growth for fiscal 2024.

HPE Financial Data

In terms of HPE’s financials, I believe the company is well positioned to be in a strong position at the end of fiscal 2024 and fiscal 2025. For the third quarter of 2024, I forecast revenue to be $7.9 billion with diluted EPS of $0.52 per share. For fiscal 2024, I forecast revenue to grow to $30.6 billion and fiscal 2025 to be $32.7 billion. I anticipate diluted EPS to be $1.64 per share and $2.03 per share for fiscal 2024 and fiscal 2025, respectively. This will lead to free cash flow growing to $2.27 billion and $2.7 billion for fiscal 2024 and fiscal 2025, respectively. I believe HPE will achieve significant strength in the server and edge intelligence segments as a result of AI infrastructure improvements by enterprises and hyperscalers.

Valuation and shareholder value

Currently, HPE shares are trading significantly lower than its peer infrastructure integrator, at 7x EV/EBITDA on an unadjusted basis.

I believe this positions HPE as the value pick in the server space, especially when considering the growth opportunity at play with private, public, and hybrid cloud environments. I believe HPE will achieve similar growth in its server and networking segments as achieved by peer companies in Q3 2024, which will likely be reflected in the stock price after earnings. As a result, I am raising my price target to $28.70/share at 6.70x FY25 EV/EBITDA and reiterating my BUY rating.

The valuation model below consists of historical trading premiums for HPE combined with a probability factor for achieving these multiples. The factors are tied to my fiscal 2025 EBITDA forecast.