HPE stock falls 5% despite strong AI-driven results

Hewlett Packard Enterprise reported July-quarter revenue of $12.2 billion and adjusted earnings per share of $1.11, topping forecasts. The company raised guidance for the October quarter and for fiscal 2026 and 2027. Shares fell more than 5% in after-hours trading after investors focused on margin and supply concerns.

HPE said its cloud and AI business generated $9 billion, up 25% year over year. Server revenue increased 35% to $6.8 billion and storage revenue rose 10% to $1.3 billion. The company supplies both conventional data-center servers and AI-optimized systems that use processors and accelerators such as GPUs.

For the October quarter, HPE forecast revenue between $13.9 billion and $14.8 billion and adjusted EPS of $1.20 to $1.30. The company also updated longer-term targets, projecting fiscal 2026 revenue growth of 34% to 37% and fiscal 2027 growth of 13% to 17%. HPE expects its networking business to grow about 73% to 74%.

HPE warned that operating margins could decline sequentially in the October quarter as a higher share of AI systems in the sales mix and pricing shifts pressure profitability. CFO Marie Myers warned, “We expect our operating margin rate to decline sequentially, driven primarily by a higher mix of AI systems in cloud and pricing.”

Myers identified component shortages as a constraint, naming memory as the most significant bottleneck, followed by NAND flash, central processing units and drives. She said the company has signed longer-term supply agreements and increased targeted purchases to improve access to critical parts and added, “Demand is far outstripping supply.”

Inventory rose to $11.82 billion at the end of July from $7.16 billion a year earlier. Management attributed the increase to higher commodity costs and deliberate purchases to secure components and support increased orders and backlog. Higher inventory can help fulfill orders but also ties up cash and raises exposure if demand slows or component prices fall.

Industry estimates put global spending on AI infrastructure at more than $730 billion this year. HPE executives stated they expect enterprise adoption of AI to support growth beyond the current fiscal year while noting that supply constraints and a shifting product mix will affect near-term profitability.