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Cloud Migration Continues Hurting Hewlett Packard Enterprise Co Stock

Tom Taulli

CEO Meg Whitman has done a tremendous job in transforming Hewlett Packard Enterprise Co (NYSE:HPE). During her tenure, which lasted about six years, HPE stock returned about 89%.

Of course, this has involved pulling off the biggest divestiture in corporate history, which resulted in the split of the iconic HP Inc (NYSE:HPQ). Whitman slashed the overall headcount by 82,000 as well as initiated about $18 billion in dividends and buybacks.

But what now? What can we expect from HPE stock? Well, of course, Whitman has agreed to step down. As for the replacement, he is 50-year-old Antonio Neri. And yes, Whitman thinks he is the right person for the next stage of HPE’s journey. During the latest earnings call, she noted:

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“I said for many years that the next leader of HPE should come from within the company and Antonio Neri is exactly the type of leader I had in mind. Antonio is a 22-year veteran of our company who began his HP career as a customer service engineer in the EMEA call center. He is a computer engineer by training, has a deep technology background and is passionate about our customers, partners, employees and culture.”

For holders of HPE stock, it is important to keep in mind that Neri has made some good strategic calls during his career. Perhaps the most notable was the acquisition of Aruba Networks, which has been a robust engine for growth.

But despite all this, Wall Street is fairly skeptical. On the heels of the CEO announcement, HPE stock sold off by about 8% (this also was on the day the company reported less-then-stellar earnings).

And I think there is good reason for this. The big issue facing HPE stock is the growth of the cloud, which has put more pressure on the sales of traditional servers.

Hey, more and more companies realize it is better to outsource their IT infrastructures to operators like Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL).

Even worse, HPE’s server market continues to remain under tremendous competitive pressure with rivals like Dell and Cisco Systems, Inc. (NASDAQ:CSCO). Oh, and mega tech operators, such as Facebook Inc (NASDAQ:FB), have been outsourcing their server production to low-cost providers in Asia.


In light of all this, it should be no surprise that the market has become more commoditized.

Now HPE has been trying to expand outside of the server category. To this end, the company has made several key acquisitions, such as for Silicon Graphics and Nimble Storage. There have also been internal efforts that look promising, such as:

  • Edgeline Converged Systems: This is focused on the emerging area of IoT (Internet-of-things).
  • Apollo: This is a platform that brings supercomputing to the enterprise.
  • HPE InfoSight: This is an AI (Artificial Intelligence) system for the storage business, which helps to predict and prevent issues with IT infrastructure.

Yet the server segment still accounts for 48% of the total operational revenues (this excludes the financial services component). In other words, this will likely weigh on the top-line for some time, even if HPE gets more aggressive with its dealmaking.

Bottom Line On HPE Stock

Note that HPE stock does not look particularly expensive. The forward price-to-earnings multiple is 11.7X, and the dividend yield is also at a respectable 2%.

As for the financials, they are solid. Consider that the net cash position is $6 billion. And given the cost cutting (which will likely continue) there should be growth of the cash flows.

But again, the core server business is will likely be a cap on the performance on HPE. So all in all, it’s probably not a good idea to consider a buy at this point, until there is a more convincing strategy.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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