HPE Expands AI and HPC Portfolio: How Should You Play the Stock?

Hewlett Packard Enterprise HPE shares have gained 21.6% in the past six months, outperforming the Zacks Computer and Technology Sector and the S&P 500 index’s return of 11.7 and 12.7, respectively. HPE also outperformed the Zacks Computer - Integrated Systems industry's decline of 2.3% in the past six months. HPE’s outperformance reflects investors’ confidence in the company’s innovative portfolio, which is demonstrating significant growth in the high-performance computing (HPC) and artificial intelligence (AI) space.HPE recently extended its footprint in the HPC and AI space with the introduction of new products, including new cooling systems, networking and storage components, AI-optimized servers and user service software. HPE’s new portfolio of compute systems also leverage accelerators from Advanced Micro Devices AMD, Intel INTC and NVIDIA NVDA, enabling users-tailored performance.The newly launched HPE Cray Supercomputing EX4252 Gen 2 Compute Blade features a one-rack unit system capable of carrying up to 98,304 cores in a single cabinet. The accelerator is equipped with eight 5th Gen AMD EPYC processors for high performance workloads. Another accelerator namely the HPE Cray Supercomputing EX154n is capable of accommodating up to 224 NVIDIA Blackwell GPUs in a single cabinet.On the networking front, HPE has launched Slingshot interconnect 400, which integrates network interface controllers, cables and switches to offer 400 gigabit-per-second of data speed. HPE has also unveiled Cray Supercomputing Storage Systems E2000, which doubles the input-output operations compared to the previous generation. Based on an open source Lustre file system, the E2000 optimizes CPU and GPU-based operations by cutting down the idle time.Its latest servers include the ProLiant Compute XD680 server and XD685 server. The ProLiant Compute XD680 server is integrated with Intel Gaudi 3 AI accelerators while the XD685 server will either come with NVIDIA H200 SXM Tensor Core GPUs or NVIDIA Blackwell GPUs. Both these servers are AI-optimized and developed with price-for-performance efficiency. HPE has also launched user service software to enable its customers to optimize power consumption and system efficiency and offer flexibility across various devices.Hewlett Packard Enterprise 6 Month PerformanceImage Source: Zacks Investment ResearchHPE Focuses on Expanding AI PortfolioHPE is continuously expanding its portfolio. In the fourth quarter of fiscal 2024, HPE expanded its portfolio with multiple product launches. Hewlett Packard has expanded the capabilities of its Aruba Networking Central with new capabilities like AI insights, OpsRamp integration, improved configuration engine, enhanced network visibility and AI-powered network optimizations.HPE also launched the ProLiant DL145 Gen11 server, ProLiant Compute XD685 and the industry’s first 100% fanless direct liquid cooling systems architecture in the ongoing quarter. The company also unveiled HPE Private Cloud AI, which enables customers to launch generative AI virtual assistants rapidly by using private data.Hewlett Packard Enterprise views AI, Industrial Internet of Things and distributed computing as the next major markets. Therefore, the company has invested multi-billion dollars over the past few years to enhance its capabilities across the aforementioned space.HPE is also reaping the benefits of its investments. In the third quarter of fiscal 2024, HPE achieved approximately $1.3 billion in revenues from its AI systems this quarter, marking a 39% increase compared with the second quarter. In the storage division, HPE has experienced double-digit growth in orders of the HPE Alletra Storage lineup. The HPE GreenLake hybrid cloud SaaS offerings also experienced double-digit growth in that quarter.Near-Term Headwinds Exist for HPEHewlett Packard Enterprises’ near-term prospects might be hurt by softening IT spending. Higher interest rates and inflationary pressures are hurting consumer spending. On the other hand, enterprises are postponing their large IT spending plans due to a weakening global economy amid ongoing macroeconomic and geopolitical issues. This does not bode well for HPE’s prospects in the near term.The United States and China’s tit-for-tat trade war is a major threat to the company. Further, longer sales cycles, which are stretching the time to close certain deals are a major overhang. Execution challenges faced by the company across some of its business units are hurting its top-line growth.These factors have pressured HPE's revenues, leading the company to set modest fiscal 2024 sales growth expectations of only 2-3%. The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $29.9 billion, indicating year-over-year growth of 2.71%.HPE expects its non-GAAP EPS in the range of $1.92-$1.97. The Zacks consensus estimate for the same is pegged at $1.95, suggesting a year-over-year decline of 9.3%.What Should Investors Do?Although HPE is rolling out innovative products that are well received by its customers, the current macroeconomic condition of the company is acting as a major headwind for it.Considering all these factors, we suggest investors to retain this Zacks Rank #3 (Hold) stock at present. 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