Hewlett Packard Enterprise has had an impressive run over the past six months as its shares have beaten the S&P 500 by 11.1%. The stock now trades at $27.95, marking a 15.2% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy HPE? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does HPE Stock Spark Debate?
Born from the 2015 split of the iconic Silicon Valley pioneer Hewlett-Packard, Hewlett Packard Enterprise (NYSE: HPE) provides edge-to-cloud technology solutions that help businesses capture, analyze, and act upon their data across hybrid IT environments.
Two Positive Attributes:
1. ARR Surges as Recurring Revenue Flows In
We can better understand Hardware & Infrastructure companies by analyzing their ARR, or annual recurring revenue. This metric shows how much Hewlett Packard Enterprise expects to collect from its existing customer base in the next 12 months, giving visibility into its future revenue streams.
Hewlett Packard Enterprise’s ARR punched in at $2.87 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 49.2%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s product offerings. Its growth also makes Hewlett Packard Enterprise a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Economies of Scale Give It Negotiating Leverage with Suppliers
With $35.74 billion in revenue over the past 12 months, Hewlett Packard Enterprise is a behemoth in the business services sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices.
One Reason to be Careful:
Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Although Hewlett Packard Enterprise has shown solid fundamentals lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
Hewlett Packard Enterprise has huge potential even though it has some open questions, and with its shares topping the market in recent months, the stock trades at 12× forward P/E (or $27.95 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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