Hewlett Packard Enterprise (HPE.US) is set to report its third-quarter earnings after the market close on Wednesday. Wall Street analysts predict Hewlett Packard Enterprise will post earnings per share of $0.43, down 14% from the same period last year. Revenue is expected to reach $8.78 billion, representing a 13.9% increase year-over-year. Over the past 30 days, consensus EPS estimates for the quarter have been revised upward by 1.95% to current levels.
The computing power required to run artificial intelligence tools has created a sales boom for high-performance server manufacturers like Dell (DELL.US), Super Micro Computer (SMCI.US), and Hewlett Packard Enterprise. However, investors have been concerned about the profitability of AI servers, as these machines rely on expensive processors manufactured by companies like NVIDIA (NVDA.US) and AMD (AMD.US).
Previously, NVIDIA reported somewhat lackluster results. Meanwhile, Dell Technologies posted declining AI server sales compared to the previous quarter, with profit margins on these high-performance machines falling short of analyst expectations. In the second quarter ended August 1, Dell recorded $5.6 billion in AI server orders, down from $12.1 billion in the previous quarter. The company shipped $8.2 billion worth of servers this quarter, with a backlog of $11.7 billion at quarter-end.
Earlier, Super Micro Computer unexpectedly lowered its performance guidance, projecting total sales of at least $33 billion for the fiscal year ending June 2026. By contrast, in February this year, Super Micro Computer management had provided a highly optimistic long-term outlook due to strong demand for AI server product lines, projecting fiscal year sales of $40 billion - nearly double Wall Street analysts' estimates at the time. This guidance revision triggered severe selling in the stock market.
However, worth noting is the company's acquisition of Juniper Networks. Following the acquisition of Juniper Networks, analysts believe the deal will boost the company's performance. The third-quarter results will mark a turning point for company performance, as Juniper Networks' results will be integrated into Hewlett Packard Enterprise's consolidated performance. This is enhancing momentum in the artificial intelligence systems sector.
Following the Juniper Networks acquisition, Morgan Stanley upgraded Hewlett Packard Enterprise to "overweight," citing expected growth in artificial intelligence (AI) and networking sectors with the Juniper Networks acquisition. This upgrade comes as the technology services company attempts to capitalize on growing demand for AI-related hardware and services.
The Juniper Networks acquisition significantly strengthens Hewlett Packard Enterprise's presence in the networking sector and further increases its investment in artificial intelligence technology. Morgan Stanley analysts believe this acquisition will significantly boost HP's profitability, with fiscal 2026 earnings per share expected to be 18% higher than current expectations, and fiscal 2027 earnings per share projected to reach $2.70 to $3.00.
This upgrade is part of Morgan Stanley's broadly optimistic sentiment toward the entire technology hardware sector. Morgan Stanley also raised target prices for other companies in the sector, including Dell and NetApp (NTAP.US), indicating overall optimistic prospects for enterprise technology spending, particularly in AI and networking-related areas.
Additionally, the company's October analyst meeting is viewed as the most important upcoming positive catalyst, where HP is expected to provide longer-term forecasts to help the market better assess the company's future earnings and cash flow potential.
Furthermore, Evercore ISI analyst Amit Daryanani believes NVIDIA's earnings situation sends positive signals for several tech companies he covers - though their after-hours stock prices haven't reflected this. He noted that Dell and Hewlett Packard Enterprise could potentially benefit from trends emphasized by NVIDIA management.
Daryanani wrote: "Looking ahead, autonomous AI appears to require more computing power for inference and training than expected, and we believe this will drive sustained demand growth, especially from the enterprise customer base that Dell and Hewlett Packard Enterprise target."
Analysts also point out that Hewlett Packard Enterprise's momentum in artificial intelligence systems continues to strengthen. This is evident in orders, conversion rates, backlogs, and near-term revenue growth. In the past quarter, the company secured $1.1 billion in new AI orders, with about one-third coming from the enterprise segment, with particularly strong performance in sovereign business.
The company achieved $1 billion in AI revenue in the second quarter. This figure increased more than 10% sequentially from the previous quarter, while initial expectations were for a slight decline. The company has $3.2 billion in unfulfilled AI systems revenue.
In the third quarter, revenue in this business area is expected to achieve strong double-digit growth due to the upcoming completion of Blackwell NVL72 deployment work.
However, analysts also highlight risk factors: one underperforming category is profit margins in the server business segment - an issue also faced by Hewlett Packard Enterprise's competitors mentioned above. In the second quarter, server business operating margins were 5.9%, down 510 basis points year-over-year and 220 basis points sequentially.
Notably, the sequential decline is indeed concerning, and if the company cannot improve profit margins in this business segment by year-end, this would pose risks to the bullish outlook. Management expects third-quarter server business operating margins to be in the mid-to-high single digits due to increased AI systems mix.
Given this expectation, profit margins in this business segment appear unlikely to recover to approximately 10% until after fiscal Q4 2025. In the last quarter, this segment accounted for 53% of total revenue. However, its operating profit represented only 36% of total profits. Analysis indicates this situation must improve for continued upward momentum.