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A general view of the Hewlett Packard Enterprise company offices in Minneapolis, Minnesota, on Jan. 3, 2024.
Company: Hewlett Packard Enterprise (HPE)
Stock Market Value: $19.88B ($15.14 per share)
Hewlett Packard Enterprise shares over the past year
Activist: Elliott Investment Management
Ownership: ~7.4%
Average Cost: n/a
Activist Commentary: Elliott Investment Management has built a reputation as a highly effective activist investor, employing a team enriched with analysts from notable tech private equity firms, as well as seasoned professionals including former technology CEOs and COOs. They conduct careful analysis before investing and often collaborate with management consultants and industry experts. Historically, Elliott has engaged in strategic activism within the technology sector, yielding significant results, and their recent expansion into governance-focused activism suggests a deeper influence on a broader range of companies.
What’s happening
Behind the scenes
Hewlett Packard Enterprise, established as a separate entity from HP Inc. in 2015, specializes in technology solutions that span from edge computing to cloud services. Following the spin-off, HPQ maintained its focus on consumer products like PCs and printers, while HPE concentrated on servers, storage solutions, and network systems. HPE’s revenue sources are notably diverse, with 53.8% stemming from its Server segment, 17.88% from Hybrid Cloud, and 15.04% from Intelligent Edge technologies. Although HPE boasts a diverse and comprehensive product lineup that distinguishes it from competitors such as Dell and Cisco, market perceptions often undervalue the company; it currently trades at less than 5 times earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to Dell’s more than 7 times, indicating a substantial discount.
This undervaluation is attributed to HPE’s operational challenges and a diminishing trust among investors. In the first quarter of 2024, HPE reported a decline in net revenue within its core Server business, stemming from mispricing relative to inventory costs—a significant oversight that wasn’t addressed until late in the quarter. This misjudgment led to a steep drop in stock value following the earnings announcement, while Dell recorded both revenue and margin increases during the same period. This trend is part of a broader pattern; since Dell’s return to the New York Stock Exchange in late 2018, it has significantly outperformed HPE, with returns that exceed HPE’s by over 200%.
While HPE’s Server segment is fundamental, substantial growth potential lies within its Intelligent Edge business, which contributes a notable portion of the company’s overall profit. With networking peers like Cisco trading at 12 times EBITDA, if HPE’s Intelligent Edge were assigned a similar valuation, it could command nearly its entire current enterprise value. This suggests considerable latent value from HPE’s core segment and its Cloud Storage offerings, particularly if operational efficiencies improve. The potential for elevating these business segments to Dell’s 7 times EBITDA valuation is evident, especially given the distinct market profiles of each company; HPE’s primary strength rests in its networking business, whereas Dell is largely centered on a lower-valued PC segment.
Compounding these challenges is the uncertainty surrounding HPE’s proposed $14 billion acquisition of Juniper Networks, a strategic move that could enhance HPE’s market position. However, the deal is currently facing legal obstacles, as the Department of Justice has initiated action to block what it perceives as potentially anti-competitive consolidation. This poses a significant risk, especially as investors are likely to be apprehensive given HPE’s recent struggles in execution. If the acquisition is halted, HPE would likely find itself sitting on a substantial cash position, raising concerns about the company’s management strategy going forward. Conversely, should the acquisition proceed, there is skepticism about HPE’s capability to manage and integrate such an expansive acquisition effectively.
Amid these dynamics, Elliott Investment Management assumes a critical role. Their potential involvement on HPE’s board could alleviate investor fears surrounding the uncertain acquisition, providing assurances regarding strategic decision-making. If the Juniper deal collapses, a well-represented board could guide the utilization of cash reserves toward either prudent acquisitions or shareholder buybacks. If the acquisition proceeds, Elliott’s oversight might enhance the integration process. Elliott’s activism within the tech space has consistently yielded positive returns, with the firm’s previous engagements resulting in substantial returns—averaging over 20% compared to the Russell 2000 during a decade of activity in the sector. Additionally, when Elliott has secured board seats, their performance has rarely been short of impressive.
In the context of prevailing economic conditions, it is worthwhile to mention that HPE appears better insulated against certain geopolitical tensions compared to Dell. HPE’s production, primarily aligned with the United States-Mexico-Canada Agreement, benefits from a manufacturing base in Mexico, while Dell’s operations have a significant dependency on China, exposing it to tariff-related challenges.
Ken Squire is the founder and president of 13D Monitor, an institutional research service focused on shareholder activism. He is also the founder and portfolio manager of the 13D Activist Fund, which invests in a strategy centered on activist 13D investments.
Source
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