One of the more notable bulls in the Hewlett Packard (HPE) camp is getting cold feet. Deutsche Bank’s Jeriel Ong lowered his price target on HPE from $17 to $15, on account of “recent hardware and market wide weakness.” Nonetheless, investors stand to take home a 74% gain should the new target be met over the next 12 months. Accordingly, the analyst maintained his bullish stance on the tech giant with a Buy rating. (To watch Ong’s track record, click here)
Despite the target reduction, Ong remains confident in the company’s model. Following a chat with HP investor relations, the analyst is “more puzzled with HPE’s YTD relative stock decline.” HP’s Share price has been hit hard since the coronavirus outbreak and is down by 50% year-to-date.
Among the key takeaways from the conversation, Ong notes HP’s relatively small exposure to industries heavily affected by the outbreak. To wit, COVID-19’s impact is unequal, and dependent upon size and sector. Smaller businesses with less cash flow are more likely to bear the brunt, as opposed to large companies and those in the public sector. Most of HP’s clients are in the latter camp, with revenue from small to medium businesses taking up less than 15%. Business from the heavily affected travel, hospitality and energy sectors also makes up less than 15%.
Additionally, the company’s balance sheet remains strong, with HP disclosing it currently has $3.2 billion in cash and an extra $4.75 billion accessible from credit facility drawdowns. Sealing the case for the analyst, is HP’s “high recurring revenue and operating profit.”
Ong noted, “HPE highlighted that ~1/3 of their revenue is recurring in nature, while a larger 75% + in EBIT is also recurring. Specifically within PointNext, Operational Services maintains an average contract of 3 years with strong renewal rates, and overarchingly, GreenLake is driving incremental recurring revenue… We believe the best comps for Hewlett Packard Enterprise are large to mid-cap, technology stocks across the hardware, software, and services end markets.”
All in all, the Street is currently taking a cautious approach to HP. The Hold consensus rating breaks down into 4 Buys, 5 Holds and 2 Sells. The bulls have the edge, as the average price target comes in at $14.27 and implies potential upside of 82%. (See Hewlett Packard stock analysis on TipRanks)