Hewlett Packard Enterprise sees record AI revenue, yet stock drops amid margin concerns

Hewlett Packard Enterprise (HPE) reported record-breaking AI revenue in its latest earnings, driven by growing demand for AI servers equipped with powerful Nvidia graphics processing units. Despite the impressive revenue growth, HPE’s stock dropped by over 2% in extended trading, raising concerns about the company’s profit margins in its AI server business.

Record AI Revenue Amid Falling Stock Prices

HPE announced a remarkable 39% increase in AI server revenue compared to the same period last year, reaching $1.3 billion. The surge in demand for high-performance AI servers comes as companies increasingly invest in the computing power required to handle complex AI workloads. HPE exited the quarter with a robust $3.4 billion backlog, reflecting strong customer demand.

However, despite these gains, HPE’s stock fell by over 2% in extended trading after declining 1.5% during the regular session. Analysts pointed to concerns over the company’s adjusted gross margin, which fell to 31.8%, down from 33.4% a year ago, indicating weaker profitability in its AI server segment. The high cost of Nvidia GPUs, which power these servers, is a significant factor behind the slimmer margins. HPE President and Chief Executive Officer Antonio Neri acknowledged the challenge but expressed confidence in driving future growth by pairing AI servers with higher-margin services and products.

Strategic Moves and Market Outlook

HPE’s strategy focuses on its edge-to-cloud strategy, combining networking, hybrid cloud, and AI capabilities. During a conference call with analysts, Chief Financial Officer Marie Myers emphasized HPE’s intention to pursue “profitable growth” by targeting a broader spectrum of customers, including model-builders, sovereign governments, and enterprises. Myers expressed optimism about the company’s AI server market, especially in the enterprise AI segment, where HPE’s offerings are considered “particularly well-suited.”

The company’s future growth also involves strategic moves beyond AI servers. HPE recently sold its stake in H3C Technologies Co., generating a cash windfall of approximately $2.1 billion. This sale is expected to finance HPE’s planned acquisition of Juniper Networks Inc., aimed at expanding its networking capabilities. The acquisition has been approved by EU regulators and awaits approval from U.S. and U.K. authorities.

Mixed Reactions from Analysts

While HPE raised its full-year earnings guidance to a range of $1.92 to $1.97 per share, up from the previous $1.85 to $1.95, some analysts remain cautious. Woo Jin Ho, an analyst at Bloomberg Intelligence, highlighted that the issue of “weak AI server margin” could overshadow the company’s strong AI sales momentum. This concern is not unique to HPE; competitors like Dell Technologies Inc. and Super Micro Computer Inc. have also faced similar challenges, driven by bulk sales to cloud service providers that demand larger discounts, squeezing profit margins.

Future Guidance and Market Positioning

Looking forward, HPE provided tepid guidance for its next quarter, forecasting earnings between 52 to 57 cents per share on revenue of $8.1 billion to $8.4 billion, slightly aligning with Wall Street’s expectations of 55 cents on $8.2 billion. The mixed outlook reflects cautious optimism as the company continues to navigate a competitive AI server market with varying profit margins.

As HPE continues to push forward in AI and edge computing, its ability to pair high-revenue products with more profitable service offerings will be crucial. Neri’s emphasis on innovation and a balanced portfolio approach suggests that HPE is strategically positioning itself to capture growth while managing profitability in an evolving market.