Respected Wall St analyst snips HPE's share price rating

Off pace in server market. As for cloud... don't even go there

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An influential Wall Street analyst has downgraded its rating for Hewlett Packard Enterprise's stock, citing fears about the supplier's small footprint in cloud computing and ceding share in servers.

"We are lowering our rating on HPE from Outperform to Market-Perform and our price is $20 to $18," said Toni Sacconaghi Jr, senior sell-side equity research analyst at Bernstein.

There are varied reasons for this change, the first being that "despite a robust IT spending environment" HPE will struggle against relatively tougher year-on-year comparisons – numbers improved in fiscal '17.

Sacconaghi added that the "continued share losses in servers, a headwind from currency, an expected higher tax rate, and lower other income" were also contributing factors to near-term expectations.

In servers, HPE has been off pace since the second calendar quarter of 2016, either growing slower than the market average or declining faster, Gartner numbers showed.

HPE has told The Reg in conversations that it wants profitable growth in servers, but relinquished first place to Dell EMC a couple of quarters ago and is falling ever farther behind.

"The upshot is that it is unclear whether HPE can report positive revenue growth or eclipse consensus EPS (earnings per share) over the next several quarters," said Sacconaghi.

He added Bernstein remains "skeptical" about HPE's longer-term ability to grow in a world that is gradually shifting more workloads to the cloud, given that the company remains an on-premises player in an increasingly off-premises world and has been a persistent share loser in servers, "its most important business".

HPE has bet the farm on Edge Computing. It is investing $3bn R&D in the networking tech over the next three years, but Aruba Networks still only accounts for 10 per cent of group revenues, Sacconaghi said.

In terms of consumption-based sales, HPE admitted months ago at Discover in Las Vegas that just 5 per cent of its global tech sales are sold as-a-service, meaning it lags even old-world competitors.

It is trying to push more consumption-based selling via Pointnext, its consultancy/professional services arm, but so far failing to get more resellers behind its Flex frameworks that sell tech as-a-service.

Bernstein also warned that restructuring charges at HPE will impede free cash flow in HPE's fiscal 2020, starting in November 2019. The charges pertain to the HPE Next initiative that started last summer: a dramatic cross-company effort to revamp processes, investments, people and overheads. It is being overseen by CEO Antonio Neri.

Sacconaghi pointed out HPE's shares have gone up 80 per cent since it split from the PC and printer side of the house. This compared favourably to a 43 per cent rise for the S&P 500. This change in rating could be something of a reality check for some investors. ®


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