Hewlett Packard Enterprise (HPE) reported better-than-expected fiscal third-quarter results and raised its revenue growth forecasts for fiscal 2026 and 2027, but shares fell more than 5% in extended trading as investors weighed the sustainability of margin gains amid supply constraints and a growing mix of AI systems.
For the quarter ended July 31, HPE posted revenue of $12.2 billion, up 34% year over year and above the $12 billion consensus estimate from FactSet. Adjusted earnings came in at $1.11 per share, well ahead of the 93 cents analysts expected. The company's cloud and AI segment generated $9 billion in revenue, a 25% increase from the prior year.
Server revenue jumped 35% to $6.8 billion, while storage revenue rose 10% to $1.3 billion. HPE supplies both traditional data-center servers and AI-optimized systems that incorporate accelerators such as Nvidia's graphics processing units, making its results a key barometer for enterprise AI infrastructure spending.
The strong performance follows upbeat forecasts from rivals like Dell Technologies and Super Micro Computer, as technology companies collectively plan to spend more than $730 billion on AI infrastructure this year. HPE's results add to evidence that enterprises are rapidly expanding computing capacity to support AI workloads.
Raised guidance signals sustained AI demand
HPE raised its outlook for the current fiscal year and fiscal 2027. For the October quarter, the company expects revenue between $13.9 billion and $14.8 billion, with the midpoint above the $13 billion FactSet consensus. Adjusted earnings are projected at $1.20 to $1.30 per share, also above the $1.07 analysts forecast.
For fiscal 2026, HPE now anticipates revenue growth of 34% to 37%, with its networking business expected to expand by 73% to 74%. The company also lifted its fiscal 2027 revenue growth forecast to between 13% and 17%, suggesting AI demand will remain a key growth driver beyond the current spending cycle.
"It's clear to us that the market, the tailwinds in AI, particularly the adoption of AI in the enterprise, is really starting to settle in," said CFO Marie Myers. HPE expects enterprise AI adoption to continue supporting growth beyond the current fiscal year.
Supply constraints and margin pressure temper enthusiasm
Despite the strong results, investors appear focused on the challenges ahead. Myers noted that component shortages remain a constraint, with memory being the biggest bottleneck, followed by NAND, CPUs, and drives. "Demand is far outstripping supply," she told Reuters.
HPE has responded by signing longer-term supply agreements to secure critical components, but shortages could still affect order fulfillment and margins. Management expects operating margin to decline sequentially in the October quarter, driven by a higher mix of AI systems and pricing dynamics.
"We expect our operating margin rate to decline sequentially, driven primarily by a higher mix of AI systems in cloud and pricing," Myers said on the earnings call. That guidance likely explains why the stock did not rally on the otherwise strong report.
Inventory build-up signals confidence but adds risk
HPE is also building inventory to support higher orders and its growing backlog. Inventory stood at $11.82 billion at the end of July, up significantly from $7.16 billion a year earlier. Myers attributed the increase to "higher commodity costs and targeted purchases to support increased orders and increased backlog."
Higher inventory can help HPE secure components needed to fulfill customer orders, particularly when suppliers are constrained. However, it also ties up capital and exposes the company to risks if demand slows or component prices fall. For now, management appears confident that demand will remain strong enough to justify the additional inventory.
The broader AI infrastructure race is broadening, with enterprises across industries investing heavily in compute capacity. HPE's raised guidance suggests the company expects to remain a key beneficiary, but investors will be watching closely to see if margin pressure persists as AI systems become a larger share of the product mix.
This article is for informational purposes only and does not constitute financial advice.
