Hewlett Packard Enterprise (HPE) shares tumbled 8% on Monday after Evercore ISI downgraded the stock to In Line from Outperform, citing the company's recent sharp rally and a more balanced risk-reward profile. The brokerage maintained its $65 price target.
HPE closed at $62.08 on Friday, Sept. 11, after gaining 15% over the previous five sessions and 184% over the past six months. According to Evercore analyst Amit Daryanani, the stock had risen 158.5% year to date, compared with an 11.9% gain for the S&P 500. In the third quarter alone, HPE was up 37.6%, while the benchmark index gained 2.1%.
Valuation stretched versus historical averages
Daryanani said the downgrade reflects the recent appreciation in HPE's share price. The stock was trading at 13 times projected fiscal 2027 earnings, versus its five-year average of eight times. On an EV/FCF basis, it was at 14 times, in line with its historical average.
“Given the stock now trading at 13x FY27 P/E versus its five-year average of 8x and 14x EV/'27 FCF, in line with its historical average, we believe shares are fairly valued at current levels,” Daryanani wrote in a note to clients.
Evercore acknowledged that the re-rating was supported by fundamental improvements. The firm credited HPE management with strong execution during the first year of integrating Juniper Networks, particularly amid challenging supply conditions. HPE shares have gained 192% since the Juniper acquisition closed, according to Evercore.
Catalysts to watch
However, the firm said the setup could become more difficult from this point, with fewer immediate catalysts available to support another expansion in the stock's valuation multiple. Evercore identified three developments that could make it more constructive on HPE shares:
- Continued progress in integrating Juniper Networks, especially if it leads to higher margins.
- Improvement in business mix and margin quality, as cloud and AI activities generate lower margins than networking equipment.
- Any benefit from HPE's Helios opportunity.
The brokerage expects those potential tailwinds to emerge primarily during fiscal 2027 and fiscal 2028.
Networking remains key
Networking is particularly important to HPE's profitability, accounting for more than half of segment operating profit. Although networking orders increased 36% in the July quarter, pro forma revenue rose 10%, trailing the growth reported by Cisco and Arista, according to Evercore.
Evercore said HPE's recent performance had been justified by improvements in execution and the Juniper integration. Nevertheless, the firm believes further gains could depend on stronger networking supply conditions and additional margin improvement.
“From here, however, we see a tougher setup,” Daryanani wrote, adding that the balance between potential returns and risks had become more even. “With risk/reward more balanced at current levels, we are moving to the sidelines with an In Line rating.”
Investors have been closely watching HPE's AI and networking momentum, as seen in Monday.com's recent slide despite AI gains, and the broader tech selloff has also weighed on sentiment. Meanwhile, Palantir's upcoming earnings could set the tone for AI-related names.
This article is for informational purposes only and does not constitute financial advice.
