Elliott Management takes a stake in Hewlett Packard Enterprise — How it may
A general view of the Hewlett Packard Enterprise company offices in Minneapolis, Minnesota, on Jan. 3, 2024.
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Company: Hewlett Packard Enterprise (HPE)
Business: Hewlett Packard Enterprise is a global edge-to-cloud company. It delivers open and intelligent technology solutions as a service. The company offers cloud services, compute, high performance computing and artificial intelligence, intelligent edge, software and storage. Its segments include Server, Hybrid Cloud, Intelligent Edge, Financial Services, Corporate Investments and Other. Its Server segment offerings consist of general-purpose servers for multi-workload computing, workload-optimized servers, and integrated systems. Its Hybrid Cloud segment offers a range of cloud-native and hybrid solutions across storage, private cloud and the infrastructure software-as-a-service space. Its Intelligent Edge segment offers wired and wireless local area networks, campus, branch, and data center switching, and others. Its Financial Services segment provides flexible investment solutions, such as leasing, financing, IT consumption, utility programs, and asset management services.
Stock Market Value: $19.88B ($15.14 per share)
Hewlett Packard Enterprise shares in the past 12 months
Activist: Elliott Investment Management
Ownership: ~7.4%
Average Cost: n/a
Activist Commentary: Elliott is a very successful and astute activist investor. The firm’s team includes analysts from leading tech private equity firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, Elliott also hires specialty and general management consultants, expert cost analysts and industry specialists. The firm often watches companies for many years before investing and has an extensive stable of impressive board candidates. Elliott has historically focused on strategic activism in the technology sector and has been very successful with that strategy. However, over the past several years its activism group has grown, and the firm has been doing a lot more governance-oriented activism and creating value from a board level at a much larger breadth of companies.
What’s happening
Behind the scenes
Hewlett Packard Enterprise (HPE) is a global edge-to-cloud company that delivers open and intelligent technology solutions as a service. The company was spun off from HP Inc in 2015. HPQ, the RemainCo, retained the PC, desktop and printer businesses, while HPE, the SpinCo, focuses on servers, storage and networking. The majority of HPE’s revenue (53.8%) is derived from its Server segment, which consists of general-purpose servers for multi-workload computing, workload-optimized servers, and integrated systems. Its Hybrid Cloud segment (17.88%) offers a range of cloud-native and hybrid solutions across storage, private cloud and the infrastructure software-as-a-service space. Its Intelligent Edge segment (15.04%) offers wired and wireless local area networks. The remainder of HPE’s revenue is derived from its financial services, investments and other activities. This comprehensive product portfolio sets HPE apart from peers like Dell or Cisco, which typically lack one or more of these pieces. Despite this unique marketing position the company is still undervalued to its peers. Currently, HPE trades at less than 5-times earnings before interest, taxes, depreciation and amortization, compared to its closest server peer Dell at over 7-times EBITDA, reflecting a 30% discount.
The primary driver of HPE’s undervaluation appears to be poor execution and a loss of credibility with the market. In Q1, HPE reported a net revenue decrease in its core Server business. The company attributed this loss to mispricing servers relative to inventory costs, which went unnoticed until late in the quarter. As a result, the stock sold off sharply in the days following the company’s earnings. Meanwhile, Dell reported beats on both revenue and margin for the same quarter. However, this is not an isolated incident, but rather the latest in a history of underperformance. Since Dell resumed trading on the NYSE at the end of 2018, it has outperformed HPE’s returns by over 200%.
While its Server business is the core business for HPE, much of the opportunity here revolves around the networking business. This is a higher multiple business that Dell does not have. HPE’s Intelligent Edge business accounts for one-third of the company’s profits, and networking peers like Cisco trade at 12-times EBITDA. If Intelligent Edge traded at that multiple it would be worth almost the entire enterprise value of HPE today. That leaves significant value from the company’s core Server business and its Cloud Storage business even if those…
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