Can Earnings Narrow The Value Gap In Hewlett Packard?

Hewlett Packard stock price

Key Points

  • As the computing and chip industry finds a new revolution to rally on, Hewlett-Packard's earnings are placed under the magnifying glass for investors to pick on. 
  • Shares of HPE are trading lower after the release of its quarterly earnings. However, it could be based on erroneous viewpoints, as the company showcased significant revenue growth in its Intelligent Edge segment, with an equally impressive operating margin expansion. 
  • Considering the elevated P/E multiples that NVIDIA is commanding after announcing its advance within A.I., it seems that Hewlett Packard's P/E has some catching up. 
  • Management outlooks open up the path to an earnings beat for 2023, as these two sets of expected figures show investors how underrated the stock may be. Analyst ratings may need to be updated as a result. 
  • 5 stocks we like better than Hewlett Packard Enterprise

As the chip and semiconductor industry seems to have found new grounds for revolution, as seen in NVIDIA NASDAQ: NVDA sporting its new record one trillion-dollar market cap, other names in the space are looking to ride on this renewed sentiment toward the next frontier in technological advancements. Companies like Taiwan Semiconductor Manufacturing NYSE: TSM have rallied by as much as 26% during the past quarter as it stands to be the backbone of the new chip revolution operating in the artificial intelligence space. In the after-market hours of Tuesday evening, a low-flying name in the sector reported its second-quarter 2023 earnings.

Hewlett Packard Enterprise NYSE: HPE shares are trading lower by 6.6% as some investors digest the final results in the company's press release. The company reports near-record results as far as revenue goes. However, it is still experiencing some of the setbacks that other operators in the value chain are suffering from. For example, Apple NASDAQ: AAPL reported that its computer shipments declined by 40%, as noted within its Mac shipments. However, Hewlett Packard's portfolio has offset these headwinds by posting high double-digit advances in the new opportunities that generative artificial intelligence poses for the business. 


Shifting Winds

Despite its largest segment, compute, Hewlett Packard reported 9% revenue growth posing a 3% decline in the twelve months covered. The second-largest segment, Intelligent Edge, posted a 56% advance in total sales to finish the quarter at $1.3 billion. These two segments, and their underlying relationships, can give investors a more straightforward path into what management is keeping in store for the future of the business. Intelligent Edge, essentially the computing power side of things allowing for generative A.I. projects to come alive, has been quietly advancing in total revenue share and keeping a more attractive operating margin. Hewlett Packard's Compute segment carries a 15.2% operating margin, while Intelligent Edge accrues a 26.9% operating margin to its share of profits. 

What is more important for investors is the underlying pivots and advances within the two businesses. As Compute's operating margins only increased by 1.1% coupled with a 3% revenue decline, Intelligent Edge posted a 14.3% operating margin expansion over the twelve months, alongside its 56% revenue increase. The marketplace has voted on what the next wave of demand will be made of by assigning companies like NVIDIA a 203.3x price-to-earnings ratio, while Hewlett-Packard carries only a 23.7x multiple. It would be airy to believe that HPE will command a significantly higher multiple to match that of NVIDIA; however, considering that the company has shown its intentions to move into the field and taking the proper steps at that, investors could soon wake up to the realization that the stock is severely underrated. 

Setting Expectations

The results seen in the new product mix enabled the company to finish the quarter with a favorable free cash flow position, which management rightly allocated to reward investors. Those who stuck by the company's challenging times to transform, and take on the new phase of its Intelligent Edge business, received the pleasant news of a $261 million capital return via dividends and buybacks during the second quarter of 2023. By shifting to higher-growth products with improved performance, the business has achieved a record gross margin of 36%, which is also expected to continue. Now that the company is presenting nothing but improvements and growth, why would the stock sell off the way it did after the announcement? Management's guidance for the year may hold the answer. 

Executives point to a relatively conservative revenue growth rate of 4-6% for the remainder of the 2023 fiscal year, with a significant discrepancy between GAAP and non-GAAP operating profit expectations. Hewlett Packard's financials will show that the income statement contains some rare items, which may drive the confusion expressed by the stock price's swing. "Transformation costs" and "Disaster charges" added to $63 million in the second quarter of 2023 and are driving an even larger wedge in the end-of-year outlooks. Management expects GAAP operating profit growth to be 180-184%, while GAAP operating profit growth is only 6-7%, driven by these non-operating charges. Following the more natural state of earnings, investors could expect to see earnings per share within the $2.06 and $2.14 range.

Hewlett Packard analyst ratings suggest that the stock only has an 8.5% upside potential, excluding the effects of the after-market sell-off. However, these ratings may only reflect the previous quarter's Intelligent Edge results, where the segment only represented 14% of total revenue compared to today's 18%. Considering this growth, coupled with the fast advancement of its operating margins, analysts may soon have to push the top-side price target of $20 as a median consensus.

 

 

 

 

 

 

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Apple (AAPL)
4.7561 of 5 stars
$189.87+0.0%0.53%29.53Moderate Buy$204.71
Hewlett Packard Enterprise (HPE)
4.5334 of 5 stars
$17.86-0.2%2.91%12.32Hold$17.91
Taiwan Semiconductor Manufacturing (TSM)
2.2157 of 5 stars
$151.68-0.4%1.13%28.89Moderate Buy$157.00
NVIDIA (NVDA)
4.7274 of 5 stars
$924.79-2.0%0.02%77.45Moderate Buy$966.55
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Gabriel Osorio-Mazilli

About Gabriel Osorio-Mazilli

  • gosoriomazzilli@gmail.com

Contributing Author

Value Stocks, Asian Markets, Macro Economics

Experience

Gabriel Osorio-Mazilli has been a contributing writer for MarketBeat since 2023.

Areas of Expertise

Value investing, long/short trading, options, emerging markets

Education

CFA Level I candidate; Goldman Sachs corporate training; independent courses

Past Experience

Analyst at Goldman Sachs, associate at Citigroup, senior financial analyst in real estate


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