Hewlett Packard Enterprise Opens Fiscal 2023 Strong Amid Macroeconomic Headwinds

We raise our fair value estimate for Hewlett Packard Enterprise HPE, or HPE, to $16, from $15, after its first-quarter results and guidance surpassed our expectations for revenue and earnings. We were skeptical of management’s seemingly lofty expectations entering the year but are impressed with the quarterly results and full-year guidance raise. We still expect a difficult demand environment for both servers and storage throughout the remainder of fiscal 2023, but note that HPE is weathering it much better than peers like Dell. Long-term, we remain wary of cyclicality and a highly competitive landscape for HPE, underscoring our no-moat rating. Shares initially jumped 5% on the strong quarter and guidance but leveled off, and we view them as fairly valued.

The firm’s first-quarter sales exceeded our expectations and the high end of management’s guidance, growing 12% year over year and bucking normal seasonality with just a 1% sequential decline. Notable outperformance came from the compute segment, which grew 15% year over year, even against a backdrop of weaker server demand. Networking remains a bright spot for demand and performance, growing 25% year over year. High performance computing and artificial intelligence grew 34% year over year, benefiting from a large contract in the quarter.

Non-GAAP gross margin of 34.2% and non-GAAP operating margin of 11.8% are strong levels for HPE, and rose both year over year and sequentially. Management credits pricing actions across the board, along with strong networking performance, for the profitability.

Fiscal second-quarter guidance was above our previous expectations, with management expecting 9% year-over-year growth at the midpoint, implying a 7% sequential decline from this quarter’s tough comparison. EPS guidance was also slightly above our previous expectations at the midpoint and we are impressed with HPE’s ability to execute despite persistent currency headwinds.