Is the Hewlett Packard Enterprise Company a Value Investment?

The Hewlett Packard Enterprise Company (NYSE: HPE) has been on a roll lately. The HPE share price grew by 16.2%; or $2.50, between 3 January and 18 October 2019.

So what is Hewlett Packard Enterprise and is it a value investment? To clarifyHewlett Packard Enterprise (NYSE: HPE) is not the historic computer maker. Instead, they spun off HPE from the Hewlett Packard Company in 2015.

Hewlett Packard Enterprise sells servers, information technology (IT), and cloud solutions to large organizations. The personal computers, printers, ink, and other consumer products come from HP Inc. (NYSE: HPQ), a separate company.

The Value Investment Characteristics at HPE

I think Hewlett Packard Enterprise has value potential because it is cheap and obscure. For instance, HPE shares were trading at $15.35 on 18 October 2019.

Additionally, HPE is unknown to the public, but it manufactures infrastructure vital to business, industry, banks, and government. In particular, Hewlett Packard Enterprise offers hybrid cloud services.

Much of modern business, entertainment, finance, commerce, retail, transportation, education, and government would be impossible without the cloud. Modern amenities that need the Cloud include fintech, social media, streaming video, artificial intelligence, Big Data, blockchain, cryptocurrency, smartphones, games, streaming audio, and investment markets.

Hence, HPE is an infrastructure company which gives it a classic value-investment characteristic. Like the infrastructure companies, Berkshire Hathaway (NYSE: BRK.B) owns HPE is obscure and unsexy.

Does Hewlett Packard Enterprise Make Money?

The Hewlett Packard Enterprise Company is making money a little money. To explain, HPE reported a gross profit of $2.523 billion on 31 July 2019.

However, HPE reported an operating loss of -$2 million and a net loss of -$27 million on the same day. On the other hand, Hewlett Packard Enterprise is a cash rich company.

HPE reported an operating cash flow of $1.196 billion and a free cash flow of $648 million on 31 July 3019. In fact, Hewlett Enterprise had $3.693 billion in cash and short-term investments on 31 July 2019.

Therefore, Hewlett Packard Enterprise offers the classic value characteristics of a low stock price and lots of cash. Yet, there are some serious problems at HPE.

The Trouble at Hewlett Packard Enterprise

The big problem at Hewlett Packard Enterprise; in my opinion, is its revenue growth rate. In particular, HPE has seen three quarters of falling negative revenue growth.

In detail, Stockrow estimates Hewlett Packard Enterprise’s revenue growth rate fell by -1.5% the quarter ending on 31 January 2019. That revenue growth rate fell to -4.68% on 30 April 2019 and -7.05% on 31 July 2019.

In contrast, HPE’s gross profit grew by 8.14% in the quarter ending on 31 January 2019. The Hewlett Packard Enterprise profit grew by 2.23% in the quarter ending on 30 April 2019; and 3.66% in the three months concluding on 31 July 2019.

Therefore, Hewlett Packard Enterprise’s business is not growing, but it is making more money from that business. I think the revenue growth rate shows HPE’s business is not sustainable.

Moreover, like Warren Buffett, I think a good revenue growth rate is critical to a business’s survival in today’s world. To clarify, I think no business or revenue stream is reliable. Therefore, every business needs growth to counter future revenue losses.

Is Hewlett Packard Enterprise a good Dividend Stock?

I think the HPE stock pays a good dividend for its low price. Specifically, Hewlett Packard Enterprise (NYSE: HPE) paid an 11.25₵ dividend on 10 September 2019.

Dividend.com gave Hewlett Packard Enterprise a dividend yield of 2.96%, an annualized payout of 45₵, and a payout ratio of 25.8% on 18 October 2019. However, HPE only experienced two years of dividend growth.

Conversely, I do not think HPE’s dividend is safe because of the industry it operations in. To elaborate, Hewlett Packard Enterprise is a small company competing directly with cash-rich giants.

Can Hewlett Packard Enterprise Survive?

For instance, Hewlett Packard Enterprise competes directly with Amazon (NASDAQ: AMZN); owner of Amazon Web Services (AWS), Microsoft (NASDAQ: MSFT), and Oracle (NYSE: ORCL). 

Notably, Oracle had $35.704 billion in cash and short-term investments on 31 August 2019. Meanwhile, Amazon had $41.463 billion in cash and short-term investments on 30 June 3019. Finally, Microsoft had an astounding $133.839 billion in cash and short-term investments on 30 June 2019.

Hence, Microsoft has $133.839 billion to spend on the expansion of its Azure Cloud. For instance, Microsoft paid $7.5 billion to buy the file-sharing platform and software repository GitHub in June 2018.

Can Hewlett Packard Enterprise Compete with Microsoft and GitHub?

GitHub threatens Hewlett Packard Enterprise because it offers users access to over 96 million repositories and the services of over 31 million developers. Moreover, GitHub estimates the number of organizations using its services grew by 40% to over 2.1 million in the last year.

The GitHub purchase shows why HPE cannot compete with Microsoft, Oracle, and Amazon. I think Hewlett Packard Enterprise lacks the buying power to become a major player in cloud services and IT.

In the final analysis, I believe Hewlett Packard Enterprise is too small to compete and survive in the cloud and IT space. Therefore, I think staying away from HPE is a smart move for investors.

In fact, I think the only way Hewlett Packard Enterprise (NYSE: HPE) can survive is to become part of a larger cash rich organization. Without far more cash there is no way Hewlett Packard Enterprise can be competitive in today’s cloud business.