Shares of Hewlett Packard Enterprise traded lower as investors brushed aside largely positive quarterly financial results and concentrated on a decline in profit margins.
For its third fiscal quarter, ended July 31, HP Enterprise reported adjusted earnings of 50 cents a share, beating the consensus call for 47 cents among Wall Street analysts tracked by FactSet. Revenue of $7.71 billion was also above the consensus call for $7.67 billion.
“We are well positioned to capture share of the growing AI infrastructure market and expect to see the continuing benefit of our cost management efforts,” said Chief Financial Officer Marie Myers in the earnings release, issued late Wednesday. “We are confident in finishing the year strong and are raising EPS guidance as a result.”
For fiscal 2024, the 12 months through October, the company now forecasts adjusted earnings of between $1.92 and $1.97 per share. It had forecast $1.85 to $1.95, while analysts had penciled in $1.92.
All of that sounds pretty positive, but investors chose instead to focus on gross margins. That number came in at 31.6%, down 4.2 percentage points from the year-earlier period.
Susquehanna analysts Mehdi Hosseini and Bastien Faucon-Morin, who rate HP shares at Neutral with a price target of $20, said they weren’t surprised by the decline. They titled their research note, “Yes, AI Servers Are Margin Dilutive!”
J.P. Morgan analysts led by Samik Chatterjee also weighed in. “The gross margin outcome in the quarter for HPE will likely only increase investor concerns around the heightened competitive dynamics and aggressive pricing in the AI Server market,” they wrote.
Evercore ISI analysts led by Amit Daryanani, who rate shares at In Line with a price target of $22, struck a similar tone. “Net/Net: HPE’s Jul-qtr came in better-than-feared on AI server revenues and networking, though similar to peers, HPE has not been insulated to gross margin pressure from AI servers,” they wrote.
The stock fell 9.4% to $17.00 in early trading Thursday.
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