HPE Shares On Rise After J.P. Morgan Upgrade: ‘Risk-Reward Looks More Balanced’

‘HPE needs to put up differentiated growth associated with Aruba/Edge infrastructure, the move to as-a-service,and High-Performance Compute, in our view,’ says the J.P. Morgan research note. “HPE also needs hybrid infrastructure solutions to occupy the middle-ground of IT investing which goes somewhat against the current trend toward hyper-scale cloud workflows and storage.”

Hewlett Packard Enterprise (HPE) shares were up 26 cents or three percent to $9.43 in mid-day trading on Tuesday after J.P. Morgan upgraded HPE shares to “neutral” with a Dec. 21 price target of $11 per share.

“The stock is down 42 percent YTD (Year To Date) –(S&P 500 down 8.5 percent) and is now trading nearly 20 percent below our price target,” said J. P. Morgan in a report from its North America Equity Research Department. “In short, we think the stock now looks attractively valued assuming we have begun to recover from the disruption caused by COVID-19, risk-reward looks more balanced, and we expect HPE to perform in line with the mean of our coverage universe.”

[Related:HPE CEO Antonio Neri: Faster Everything-As-A-Service Shift Means More ‘Long-Term Money’ For Partners]

In order to get “constructive” on the stock, J.P. Morgan said it would like to see a “recovery” in enterprise IT spending, and for HPE to outperform its peers.

“HPE needs to put up differentiated growth associated with Aruba/Edge infrastructure, the move to as-a-service, and High-Performance Compute, in our view,” said the J.P. Morgan research note. “HPE also needs hybrid infrastructure solutions to occupy the middle-ground of IT investing which goes somewhat against the current trend toward hyper-scale cloud workflows and storage.”

Although HPE reported a 16 percent decline in sales to $6 billion for its second fiscal quarter ended April 30, among the bright spots in the quarter were a 17 percent increase in GreenLake pay-per-use annualized revenue run-rate business to $520 million and a 12 percent increase in Aruba HPE’s Intelligent Edge business in North America.

The upgrade comes with HPE accelerating its edge-to-cloud everything-as-a-service sales offensive in the wake of the devastating “economic disruption” from the COVID-19 pandemic.

Hewlett Packard Enterprise CEO Antonio Neri last week told analysts that HPE is accelerating its edge-to-cloud everything-as-a-service sales offensive in the wake of the devastating “economic disruption” from the COVID-19 pandemic.

“I believe in a downturn like this is when you double down on your strategy,” said Neri in a conference call with analysts last week. “This is when you have to invest in the right places now so when the recovery takes place you come out on the other end stronger. That is fundamentally what we are doing: addressing the cost resizing for the situation we are in.”

As part of the “cost resizing,” the HPE board of directors has approved a three-year “Cost Optimization and Prioritization Plan” aimed at delivering gross savings of $1 billion with a short-term salary reduction plan and changes to its workforce, real estate model and business processes.

In its upgrade, J.P. Morgan cited the cost optimization program and competition from rival Dell Technologies. “Making a hard challenge even tougher is the intense competition that HPE faces, particularly from Dell,” said the research note. “In the meantime, the recently instituted cost-optimization program should yield $800 million of net savings by next year supporting the dividend payout (current yield is ~5 percent), and a rotation from momentum into value could buoy the stock.

Partners, for their part, have told CRN that HPE’s GreenLake pay-per-use sales model is resonating with customers in the COVID-19 era.

Russ Chow, vice president of technology solutions for New York-based PKA Technologies Inc., one of HPE's top Platinum partners, told CRN last week that Neri’s everything-as-a-service shift has put HPE at least 18 months ahead of competitors.

“HPE is spot on with regard to where the market is going,” he said. “It’s great to see HPE doubling down on that everything-as-a-service strategy. PKA has the same vision of the future. The conversations we are having with our customers is all around operationalizing their IT environments.”