HP Enterprise: Long-Term Tailwinds and Short-Term Softness at Mixed Analyst Day; Maintain Valuation

We maintain our $16 fair value estimate for shares of no-moat HP Enterprise HPE following its 2023 analyst day. The firm put forth positive long-term targets but weaker short-term guidance than we expected. The theme of the event was a focus on increasing its total addressable market in edge & networking, hybrid cloud, and artificial intelligence segments through organic and inorganic opportunities. It asserted its focus on HPE GreenLake as a key driver of gross margin expansion as well as strong annual recurring revenue growth. The firm cited challenges in the next year, however, and provided a conservative 2024 outlook. Despite shares falling on the weak guide, we maintain our long-term forecasts and view shares as fairly valued.

The company’s top-line target through fiscal year 2026 is for annual growth of 2% to 4% as the firm looks to capture higher cloud and AI revenue, particularly in AI where demand is rampant and the firm can capitalize with graphics processing unit-powered servers and its supercomputers. Beginning in fiscal 2024, HP Enterprise will break out a new hybrid cloud segment, encompassing storage, HPE GreenLake for computer, private cloud, and software. Highlighted were the total addressable market updates for its highest-growing segments by fiscal year 2026. Its edge & networking TAM is expected to grow from $62 billion to $94 billion. Hybrid cloud TAM is expected to grow from $97 billion to $164 billion, and it anticipates the largest growth in AI TAM, from $62 billion to $146 billion as a result of increased software, infrastructure, and supercomputing (related to AI) buildouts.