HPE has 'long-term' AI tailwinds to look forward to

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2 days ago

HPE (HPE) stock is moving higher after beating estimates in its fiscal second quarter and narrowing its full-year outlook despite a projected tariff-related hit.
Bloomberg Intelligence senior technology analyst Woo Jin Ho joins Morning Brief to explain why HPE's tariff exposure may be less severe than expected and how the company is positioned for long-term artificial intelligence (AI) growth.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
Let's talk about shares of HPE moving higher pre-market after reporting its results for the latest quarter. HP narrowing its guidance range for the full year, saying it expects a four cent per share hit due to tariffs and revenue growth between seven and 9%. I want to bring in Woojin Ho. He's Bloomberg Intelligence's senior technology analyst. It's great to have you on this morning. Thank you for being here. Talk to me about your reaction to these results.
Yeah, uh, thanks for having me on. Really positive results. I mean, a couple of things happened. AI is doing a little bit better than uh, people had anticipated. So, that drove a little bit of upside in the quarter. But more importantly, uh, some of the operational issues that hit them in in the first and second quarters, uh, they started to clean that up. So, some of the margin concerns, um, that heading into the print, uh, that was alleviated with the the commentary on the call as well as the outlook.
And so, thinking through HPE, is this for investors out there that are trying to figure out whether or not they need to add it to their portfolio, at this juncture, is it, is this strong, is it a strong addition to the portfolio?
Well, we don't make recommendations here at Bloomberg Intelligence. There's a couple of things that I, that I can add, uh, say, uh, is is that, uh, if you look, if you think about the, the enterprise IT play, as well as the AI enterprise player, there are only a couple of names that you can, um, um, uh, for from a US investor base, that that uh, investors can look at. It's Dell, Supermicro, and HPE. Um, I, I do think that uh, HPE, as well as Dell have long-term positive fundamentals when when AI goes from the cloud side uh, to more of the enterprise side. So, there is a long-term tailwind. It's just a little bit early, um, to, to recognize that. But uh, there are, HPE is very well-positioned for that over the long term.
Can you talk a little bit more about how you are modeling out the impact of tariff policy that continues to uh, obviously develop and change for a name like this?
Yeah, so we do do have, just to put a little bit of plug here, we do have a BI tariff matrix. Um, the, there, it's, look, it, it's actually multi-vector. Um, HPE's uh, tariff exposure is not as large as some people have feared. Uh, couple of reasons is that they make a lot of their boxes um, or assemble a lot of their boxes out of Mexico. So, that, that is going to be covered by the USMCA. So even if uh, July 9th does come back in and and reciprocal tariffs are, uh, do return, they, they will largely be exempt from tariffs. Now, uh, there's still some reciprocal tariff risk, uh, for the, uh, the on the HPE side, uh, for some of their products that are manufactured out of Vietnam or Southeast Asia. Uh, but, but that, that being said, you know, if there is going to be a drag on gross margin, it's going, it's going to be mainly on the gross margin side. Uh, you know, oddly, the aluminum uh, tariffs is going to hit the, the boxes that that cover it. But uh, that, that's where the drag is primarily coming from.
Woojin, how much of an Elliott Management overhang is there on this name right now? We know that they had already amassed about a one and a half billion dollar stake, could be worth more at this juncture.
Yeah, you know, um, if anything, it's going to be more pressure on the management team than than anything else. Um, is there an overhang? You know, it's odd, um, and maybe the timing is more coincidental. Uh, they did announce an acceleration of some of their operational or, or, or cost cut, cutting actions that was announced uh, last quarter. And there's going to be another round of uh, cost actions and operational streamlining uh, in the um, uh, you know, probably announced in the, in the October quarter as well. So, you know, they're trying to make some actions or putting some actions in place to help alleviate uh, some of, I, I guess what uh, Elliott is asking for. Uh, but at the end of the day, you know, I, I almost get a sense that they want to get a management change here.
Woojin, thanks so much for taking the time here with us this morning.
My pleasure.
And stay tuned to Yahoo Finance. We'll be sitting down with HPE CEO, Antonio Neri, in the 3:00 p.m. hour.