Hewlett Packard Enterprise Company

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

HPE provides enterprise solutions, including servers, storage, networking, software, and IT consulting, serving both small and large businesses worldwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Hewlett Packard Enterprise (HPE), often seen as the less glamorous sibling of HP, focuses solely on the enterprise business, rather than consumer computing. This means they are in the business of providing services and hardware to other businesses rather than selling directly to individual consumers.

The core of HPE’s value proposition is its suite of infrastructure solutions, including servers, storage, networking gear, and software that helps other businesses function more efficiently. It also offers a variety of advisory, professional, and managed services to help these solutions work more efficiently within their clients’ systems. In short, they are in the business of designing, building, and supporting enterprise technology.

  • Revenue Distribution: HPE segments its revenue across various sectors:

    • Server : This segment includes server products, solutions, services and associated software.
    • Hybrid Cloud: Includes data storage, software defined solutions, hybrid cloud services, IT infrastructure, and converged systems.
    • Intelligent Edge: This segment includes Wi-Fi, campus and branch networking equipment, hardware, and software.
    • Financial Services: This segment contains financing related to HPE technology.
    • Corporate Investments and Other: This is primarily the corporate headquarters and a few minor segments.

  • Industry Trends:

    • There is a clear movement to the cloud, but hybrid models are becoming more popular due to the unique needs of companies.
  • Cloud is becoming the dominant platform but there is a clear demand for on-premise, or hybrid solutions, due to cost and data concerns.
  • Artificial intelligence and machine learning (AI/ML) are increasingly seen as necessary and becoming integrated in hardware and software solutions.
  • Cybersecurity is a huge worry among the enterprises, thus, this is a focus area in modern tech.
  • There is increased concern on efficiency, not just growth.
  • The move to modularity is increasing, and a shift from horizontal to vertical integration can change the value chains of businesses.

  • There is increased demand for data processing and management.

  • Competitive Landscape: HPE competes in a highly competitive environment against a mix of legacy and disruptive technologies. Some major competitors include:

    • Dell Technologies: A major rival in servers, storage, and other enterprise solutions. Dell and HPE often compete head-to-head for customers.
    • IBM: IBM is both a rival and sometimes a partner. It also operates in the consulting and services business, which creates direct competition with HPE.
    • Cisco Systems: A competitor on the networking side.
    • Cloud Providers: Companies like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud also compete with HPE on the infrastructure side by offering scalable and easily deployed alternatives.
  • What Makes HPE Different?

While they offer components across most enterprise technology segments, HPE has more focus and commitment to specific areas where they have a more established position than other players. They have a very diverse suite of services and product portfolios, which have made them a popular choice among businesses that wish to build their own IT infrastructure, rather than going completely to the cloud. Also, they aren’t a cloud company, and they do provide solutions that help companies set up hybrid environments, which the cloud providers often try to disrupt.

* **Focus on Hardware and Services:** Unlike cloud-focused companies, HPE has a much larger portfolio of hardware products, like servers, networking equipment, and storage products. They often try to supplement this with services, like consulting and implementation, and managed services.
  • Economic Moats:
*   **Switching Costs:** The core of HPE’s moat lies in its ability to create customer lock-in. This lock-in arises primarily from high switching costs due to the complexities of migrating to new infrastructure. For companies that have used HPE solutions, which become essential to their functioning, switching to a competitor’s products can be risky and costly. Companies who depend on HPE products for various aspects of their operations (and have complex implementations around it), would likely have difficulty migrating to a new platform.

 *   **Intangible Assets:** HPE benefits from brand recognition, especially among larger companies. This can give them some pricing power. But their brand power is lower compared to companies like Coca Cola or Apple and their brand equity is more towards B2B rather than B2C products and services. However, this intangible benefit is quite low.
     * **Cost Advantages:** They benefit from economies of scale, due to their large size. This especially shows up in cost leadership in product manufacturing, but is not a strong advantage.

  • Moat Rating Justification HPE receives a moat rating of 2 out of 5. While they have some competitive advantages, namely switching costs and brand recognition, these moats are neither particularly large or durable. Many businesses are using cloud and hybrid solutions, making switching costs a non issue for them. Competitors are able to quickly copy cost benefits and there are constant innovation breakthroughs, especially in software and chips, which have a significant effect on hardware. The low rating reflects the vulnerabilities of these moats in a dynamic technology environment.

  • Legitimate Risks:

    • Technological Disruption: Rapid shifts in technology could make their current product portfolio obsolete, especially in areas where they are lagging in, like cloud-based solutions. Also, disruptive tech companies could disrupt them quickly.
    • Competition: The intensity of competition from cloud vendors and enterprise solution providers could erode HPE’s market share, especially if newer technology becomes more popular. In particular, hyperscale cloud companies are growing aggressively and trying to consolidate as much IT infrastructure and services spending as possible.
    • Economic Downturn: A reduction in corporate spending can negatively affect HPE, since business spending is often tied to the health of the overall economy. A recession would result in less spending by enterprises on HPE’s solutions.
    • Supply Chain Risks: HPE’s dependence on a complex supply chain introduces risks, such as manufacturing delays, price increases of raw materials, and product shortages.
    • Execution Risk: They need to be able to execute on the complicated and multi-layered strategies they are pushing forward, and if any stage falters, it will have an effect on revenue.
    • Erosion of Moat HPE’s moat seems to be getting more eroded due to cloud migration. The stickiness or lock in that came from maintaining IT infrastructure is diminished when there is a cloud offering that can provide the same functionality for a potentially lower price and less complex implementation.

  • Business Resilience: HPE has shown resilience through diversification and ability to provide hybrid environments. If a new technology comes to the market, the companies have a robust portfolio of expertise that can enable them to provide products or solutions on top of these. Their focus on providing solutions for the enterprise segment has been beneficial to them. Also, many companies will always rely on on-premise or hybrid solutions, due to cost, security, and data privacy considerations, making them resilient in those areas.

Financials:

HPE’s financial performance has been complex, balancing high revenues with challenges in profitability.

  • Revenues: HPE’s revenue streams are diversified, but primarily reliant on hardware sales and related services. Looking at their latest reports, we can notice that revenue growth has been lackluster with the business’s revenues staying nearly the same.
    • Margins: Margins have improved in recent times, but are still in the lower single digits. While there is growth in high-margin sectors like storage and cloud, growth in margins is hindered by high costs related to research and development, acquisitions, and overall higher operating expenses. Their target, as per their CFO, is in the double digit region.
  • Cash Flows: HPE has a tendency to have low and sometimes negative free cash flows. If they want to grow while maintaining good returns to shareholders, they need to manage their CAPEX appropriately to get higher free cash flows.

  • Capital Structure: They have been using financial engineering to optimize their balance sheet, however, their debt-to-equity ratios should be managed appropriately as they move forward.

  • Recent Concerns / Controversies:

    • HPE Stock Plunge Following Q4 Results : The most recent quarterly earnings results and the future outlook provided by HPE’s management caused a sharp decline in their share price. The company reported lower sales and earnings, and their estimates for the following year were quite conservative.
    • Economic Downturn: Companies such as HPE rely on the economic stability of the enterprise segment. If there is a major global downturn, companies would reduce their CAPEX budgets, thus directly hurting HPE’s top and bottom line. Management in the latest earnings call mentioned that they are seeing weaker demand due to the global economic situation.

  • Management’s Stance: Management is focused on improving profitability by improving operating expenses and growing their business in sectors like edge, cloud, and AI. This is their main focus, as reflected by their statements in earnings calls. Management has acknowledged that their estimates might be on the more conservative side, but they are focusing on long-term growth by creating quality products and services, and focusing their capital spending strategically.

  • Understandability Justification:

    HPE’s business is moderately complex, and therefore, it gets a rating of 3 out of 5. Their main business, to provide IT solutions and equipment to enterprises, is easy enough to understand. However, their diversified product portfolio, their heavy involvement in financial engineering, their accounting practices with relation to acquisitions, and the nature of their end customer, makes their business slightly more complex, and harder to understand for a lay investor. The need to have expertise in enterprise IT systems also makes it difficult for an ordinary investor to judge if the company will be successful going forward.

  • Balance Sheet Health Justification:

HPE’s balance sheet is relatively healthy, with adequate liquidity and a manageable debt load. Their current ratio is around 1.21, and their quick ratio around 1.01, meaning they can manage their current obligations well. Their debt to equity is around 1.5 which is manageable. They don’t have excessively large amounts of intangibles or goodwill. They can meet their interest obligations, as their interest coverage ratio is above 5. It is a quite healthy balance sheet, but does require continuous monitoring and proper risk management. Thus the rating of 4 out of 5 is given.