The Easy Money Has Already Been Made In HP Enterprise

UBS said in a note Friday easy money has already been made by Hewlett Packard Enterprise Co HPE. Given its view that a pivot to higher-margin revenue will take time, the firm downgraded shares of the company.

As such, the rating on shares of Hewlett Packard Enterprises went from Buy to Neutral. The firm also nudged down its price target from $16 to $15, reducing its target multiple from 14x to 13x, thereby removing the premium to peers due to less room for earnings growth.

At time of writing, shares of the company were up 1.41 percent at $14.06.

Inconsistent Operating Results

Analyst Steven Milunovich noted that CEO Meg Whitman commented at the analyst meeting that the company's shares have risen about 90 percent since the split compared to S&P 500's 26 percent. However, the analyst noted that the much of the upside came from the split and the two subsequent spin-offs, with operating results remaining inconsistent.

With the stock approaching the price target of UBS, the firm said it is concerned that the streamlining plans could prove disruptive. The firm is also worried that the three-pillar strategy aimed at boosting profitability may not be sufficiently differentiated against larger rivals such as Dell EMC and Cisco Systems, Inc. CSCO.

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Weakest Of Big 3

Additionally, the firm said the growth in public cloud is faster than expected. This, according to the firm could pressure Hewlett-Packard Enterprises, which is primarily an on-premise computing company. The firm thinks on-premise computing is at the risk of losing its position, as workloads move to the public cloud.

Although the company has some attractive cloud offerings, the firm believes Dell EMC and Cisco are better positioned in technology and solutions. With Hewlett-Packard Enterprises relying on partnerships to deliver solutions, the firm sees difficulty in improving margins and delivery risk.

Underwhelming Analyst Meeting

The firm views the analyst meeting and the fiscal year 2018 guidance as somewhat underwhelming. Though the 2018 guidance of $1.15-$1.25 was expected, the firm said the amount of streamlining planned in reducing management levels and product SKUs could create execution risk.

The firm also said the competitive pricing environment makes the upside to the plan unlikely. Further, the firm said it had expected a higher stock buyback than the $20 billion the company announced. The firm doesn't think the company can reach the normalized free cash flow goal of $2 billion until fiscal-year 2020.

"The long-term revenue growth rate of 0-1% is less than we previously modeled and our confidence that HPE could be a long-term winner is lessened," the firm added.