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Investing.com -- Morgan Stanley downgraded Hewlett Packard Enterprise (NYSE:HPE) to Equal Weight from Overweight, citing elevated tariff risks and delays to the company’s planned acquisition of Juniper Networks (NYSE:JNPR), which was expected to provide a meaningful earnings boost.
The brokerage said its initial upgrade of HPE in December was based on the accretive potential of the Juniper deal, but the acquisition is now on hold pending a U.S. Department of Justice trial scheduled for late summer.
In the meantime, HPE's thinner-margin structure makes it more vulnerable to the higher-than-expected tariffs announced on April 2.
Without the earnings buffer from Juniper, HPE faces more downside near term, particularly given the company’s larger exposure to hardware products and less room to absorb added costs, the analysts at Morgan Stanley (NYSE:MS) say.
Morgan Stanley cut its price target on HPE to $14 from $24, noting the new base case assumes a 30% tariff hit to cost of goods sold for U.S.-bound products, offset partially by mitigation efforts and cost cuts.
“While JNPR transaction could still be approved, there are more risks than catalysts in the near term, leaving us EW,” analysts said.
The firm’s bear case now stands at $5, down from $11, while the bull case was reduced to $25 from $34.
The firm also flagged deteriorating IT hardware demand, citing results from its survey showing a sharp drop-off in spending expectations, particularly in servers and storage, areas that Morgan Stanley says are among the “least defensible” in a macro slowdown.
While the Juniper acquisition could still be approved and eventually act as a catalyst, Morgan Stanley said risks now outweigh near-term rewards.
We could be more constructive on HPE again once there’s more clarity on tariffs, macro impacts, and the outcome of the DOJ trial, the note said.