HPE's Strategic Pivot: Can AI and Hybrid Cloud Growth Justify a 9.9x Forward P/E?

Cyrus ColeThursday, Jun 5, 2025 6:54 am ET
5min read

Hewlett Packard Enterprise (HPE) has positioned itself at the intersection of two transformative tech trends: artificial intelligence (AI) infrastructure and hybrid cloud adoption. Despite quarterly margin pressures and macroeconomic headwinds, the company's first-quarter 2025 results and strategic roadmap suggest it's betting big on these secular tailwinds. With a forward P/E of 9.9x—near the lower end of its decade-long range—the question for investors is clear: Does HPE's valuation reflect a compelling risk-reward opportunity, or does it mask deeper structural challenges?

Earnings Recap: Revenue Growth vs. Margin Pressures

HPE's Q1 results were a study in contrasts. Revenue rose 16% to $7.9 billion, driven by a doubling of AI system sales to $900 million and strong hybrid cloud storage demand (Alletra Storage MP orders surged over 100%). This beat Wall Street's expectations, yet the company's Q2 guidance missed consensus, projecting revenue of $7.2–7.6 billion versus the $8.18 billion consensus. Meanwhile, non-GAAP EPS of $0.49 met expectations, despite gross margins collapsing 680 basis points year-over-year due to aggressive server pricing and supply chain disruptions.

The disconnect between revenue growth and margin contraction is stark. HPE's server operating margins fell to 8.1%, down from 11.4% a year ago, as the company sacrificed profitability to secure AI infrastructure deals. This strategy has paid off in top-line growth but left investors questioning whether HPE can sustain its aggressive pricing indefinitely.

The AI and Hybrid Cloud Tailwinds: A Structural Opportunity

HPE's bet on AI and hybrid cloud isn't just about current revenue—it's a long-game strategy to capture the $150 billion AI infrastructure market and the $200 billion hybrid cloud opportunity. Here's why these segments matter:

  1. AI Infrastructure Dominance:
  2. HPE's Gen11 servers and liquid-cooled solutions are already powering large-scale AI projects, with revenue doubling in Q1.
  3. The shift to NVIDIA's Blackwell GPUs and quantum-resistant security features in ProLiant Gen12 systems positions HPE to capitalize on enterprise AI adoption.
  4. Hybrid Cloud Momentum:

  5. GreenLake's ARR hit $2.1 billion, up 46% year-over-year, as customers adopt consumption-based cloud models.
  6. New offerings like VM Essentials aim to displace VMware in hybrid environments, leveraging HPE's edge-to-core infrastructure.

These segments are growing at 25–30% annually, far outpacing HPE's overall revenue growth. Management's goal of achieving 10% server operating margins by Q4 2025 hinges on scaling these high-margin businesses while reducing server discounts.

Margin Recovery: Targets and Challenges

HPE's margin trajectory is critical to its valuation. The company's cost-cutting program, which includes 3,000 layoffs to save $350 million by 2027, is a direct response to margin erosion. However, two risks loom:

  1. Supply Chain and Chip Shortages:
  2. AI system revenue dropped sequentially due to delays in GPU shipments, particularly for NVIDIA's Blackwell. A prolonged shortage could stall server margin recovery.

  3. Pricing Competition:

  4. Competitors like Dell and IBM are also targeting AI infrastructure, potentially pressuring HPE to maintain aggressive pricing.

Cost-Cutting and Juniper: Catalysts Ahead

Two near-term catalysts could reaccelerate HPE's valuation:

  1. Juniper Acquisition Trial (July 2025):
  2. A $14 billion merger with Juniper Networks faces DOJ antitrust scrutiny. A favorable ruling by year-end would unlock $450 million in synergies over three years, boosting margins and FCF.

  3. Q4 Server Margin Milestone:

  4. Achieving 10% server margins by Q4 would signal successful execution of cost cuts and pricing discipline, potentially lifting shares.

Macro Risks and Valuation Analysis

HPE's risks are well-known: geopolitical tariffs, IT spending cuts in a slowing economy, and the Juniper deal's uncertainty. Yet its valuation appears to price in many of these concerns. At 9.9x forward P/E, HPE trades at a 45% discount to its five-year average of 18x. Even assuming conservative 2025 EPS of $1.80, the stock offers a 12% upside to a 14x multiple—a reasonable target if margin recovery materializes.

Investment Thesis: Buy the Dip, but Watch for Catalysts

HPE's valuation is compelling if you believe in its ability to:
- Recover margins through AI/hybrid cloud scale and cost cuts.
- Win the Juniper battle and integrate its networking assets.
- Navigate supply chain hurdles without sacrificing growth.

The stock's 3.3% post-earnings pop suggests investors are pricing in some of these positives. However, with Q2 guidance below expectations and a volatile macro backdrop, patience is key. Wait for the Juniper trial outcome or Q3 margin updates before committing capital, but keep HPE on watch lists as a potential cyclical recovery play in enterprise tech.

In short, HPE's 9.9x forward P/E isn't a typo—it's an invitation to bet on its strategic pivot. Just don't blink when the catalysts arrive.

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