Evaluating Hewlett Packard Enterprise’s Position In The AI Market (NYSE:HPE)

Hewlett Packard Enterprise (NYSE: HPE) split from HP Inc. (HPQ) in 2015, with HP focusing on personal computers and printers and Hewlett Packard Enterprise focusing on business-focused servers, storage, networking, the cloud, software, and various services. HPE benefits from many of the same trends in enterprise computing that had pushed Dell Technologies’ (DELL) stock up over 100% earlier this year. In my Dell article, I discussed how investors saw clearer evidence in its last earnings report released on May 30, 2024, that demand for artificial intelligence (“AI”) enterprise servers could be a huge growth driver for the company moving forward.

The market recently became more excited by HPE’s prospects after it released its second quarter fiscal year (“FY”) 2024 earnings report on June 4, showing AI systems revenue more than doubled from the first quarter’s results. Investors in HPE hope that now that the company’s AI initiatives are picking up, its stock performance can achieve a similar performance as Dell’s. The stock rose around 11% the day after the company released the report.

The problem is that although the market may give HPE credit for potentially benefiting from AI adoption, its strategy has several risks, including AI servers being less profitable than the traditional server business. Investors should proceed cautiously and not buy this stock purely based on its AI opportunity. Additionally, although several analysts raised its price target post-earnings, the stock price has already exceeded the consensus price target of $20.12.

This article will discuss HPE’s latest AI initiatives and review its latest earnings report. I will also examine the company’s valuation and some risks. Last, I will discuss why I believe HPE is a hold.

The company may be an AI beneficiary

Although some people focus on HPE’s opportunity to provide AI servers to its customers, it’s important to remember that the company is a complete AI solutions provider, meaning it offers services beyond its hardware components. HPE has several other services, including software tools, security solutions, Machine Learning as a Service, consulting, and a hybrid cloud tool builder named GreenLake. Hybrid computing is critical for companies using AI. Chief Executive Officer (“CEO”) Antonio Neri commented on the hybrid cloud’s importance at the Discover 2024:

AI will require hybrid cloud. But AI is not one single thing or a monolithic workload. To deploy AI, you must orchestrate hundreds of microservices, multiple AI models, specific accelerators, and connect many different data sources, all of which are highly distributed across your hybrid IT state. That is why you need a hybrid strategy. At the same time, you must maintain data governance, regulatory compliance, and security end-to-end, making on-premise private clouds essential to your hybrid mix.

As generative AI proliferates, HPE’s hybrid computing solutions, software, and other peripheral services should become more valuable over the long term. Collaborations with partners like Microsoft are also meaningful. When analysts asked Chief Financial Officer (“CFO”) Marie Myers at the BofA Securities 2024 Global Technology Conference about the partnership with Microsoft, she said, “HP is helping Microsoft extend the Azure AI platform to customers like OpenAI.”

Management also announced at its recent Investor Relations Summit @ HPE Discover 2024 that it was collaborating with NVIDIA (NVDA) on a new venture named Nvidia AI Computing by HPE. This venture addresses three critical components needed for successfully utilizing Generative AI and large language models. NVIDEO CEO said at the conference that the three necessary components are a “model stack, a data stack, and a computing stack.”

NVIDIA will contribute a product named NIM as a model stack, which are prebuilt AI models that customers can customize for different tasks. NVIDIA defines NIM as “inference microservices that provide models as optimized containers — to deploy on clouds, data centers or workstations, giving them the ability to easily build generative AI applications for copilots, chatbots and more, in minutes rather than weeks.”

NVIDIA AI Enterprise will contribute the data stack or the operating system for AI, which provides data processing, vectorization (improves the processing speed of AI algorithms), semantic embedding (captures the meaning of data), and more.

HPE will contribute the computing stack, which includes the servers, storage, and networking required to run power-intensive AI models in collaboration. If successful, this collaboration can potentially drive significant revenue for HPE. HPE also plans to bring along its sales channels and partnerships, including…