Morgan Stanley Upgrades HPE to Overweight on Zhenbo Acquisition

Morgan Stanley has upgraded its rating for Hewlett Packard Enterprise (HPE.US) to "Overweight" with a target price of $30. This decision follows HPE's completion of its acquisition of Zhenbo Network, which has significantly enhanced the company's profitability outlook and market position. The acquisition has positioned HPE among the leading network companies, providing a stronger foundation for future growth and increased earnings visibility.

Led by Samik Chatterjee, analysts at Morgan Stanley believe that the acquisition of Zhenbo Network has strengthened HPE's market position, solidifying its place among the top network companies. HPE currently leads in areas such as campus exchange, wireless local area networks, and enterprise data center exchange. The company's product portfolio, which includes switches, wireless access points, and routers, is among the broadest in the industry.

The acquisition is expected to further enhance HPE's network business, providing a higher profit margin and more stable revenue stream compared to a broader range of IT hardware devices. Morgan Stanley noted, "We believe this not only provides further upside for HPE's revenue and earnings growth over the next few years, particularly the latter, which will be further enhanced by significant cost synergies."

Analysts predict that as the proportion of high-margin network business revenue increases, coupled with the release of substantial cost synergies, HPE could achieve at least $2.70 in earnings per share by the 2027 fiscal year. This highlights the stock's significant upside potential. It is estimated that by the 2027 fiscal year, the network business will account for more than half of the company's profits, compared to 35% in the 2024 fiscal year.

While Morgan Stanley acknowledges that a more optimistic valuation scenario could push the target price above $35, they have adopted a more conservative approach. This is due to recent integration execution risks and the recent weakness in HPE's server business. Using an 11x price-to-earnings ratio for the 2027 fiscal year earnings, they arrived at a target price of $30.

Analysts also noted that recent market concerns about the company's execution capabilities may make investors more cautious. This could lead to a gradual acceptance of the company's higher price-to-earnings ratio valuation as key integration milestones are observed.