Investing.com -- Shares in HP (NYSE:HPQ) Enterprise climbed more than 2% Monday after Raymond (NS:RYMD) James upgraded the stock to Strong Buy from Outperform.
The move comes as the investment bank grows bullish on HPE’s refined business model that now separates AI platforms from traditional servers, prompting it to increase its sales estimates for the fiscal year 2025.
HP Enterprise is expected to report an in-line quarter on December 6, with potential risks stemming from the federal vertical. However, growth is anticipated to improve in the fiscal 2025 year (FY25).
The firm also expects the Juniper Networks (NYSE:JNPR) deal to close as planned, which should contribute to an expansion of HP Enterprise's stock multiple. The acquisition is seen as a positive move, with Juniper's Q3 results showing strong orders and cloud strength.
The deal is expected to improve HP Enterprise's free cash flow estimates for calendar year 2025 from $2.2 billion to $2.5 billion, accounting for the combined free cash flow from Juniper and the additional interest expense from the debt taken on for the acquisition.
Meanwhile, Raymond James projects HP Enterprise's AI server sales to grow significantly, from an estimated $4.1 billion in FY24 to $5.9 billion in FY25, and then to $7.4 billion in FY26.
“AI sales are mostly coming from AI model training applications, and HPE cited traction with sovereign networks,” Raymond James analysts led by Simon Leopold noted.
“Enterprises are still experimenting and were a mid-teens portion of backlog. As enterprise adoption expands, we expect continued strong AI sales with improving margin. We include HPE within the context of an AI networking basket.”
The firm also expressed optimism about traditional server sales, highlighting that HP Enterprise reported double-digit quarter-over-quarter and year-over-year growth in traditional server product orders.
This suggests that AI servers are not replacing traditional compute servers. Industry forecasts predict robust growth in traditional servers in the coming years, especially in the Enterprise vertical where HP Enterprise has a strong presence.
Alongside the upgrade, Raymond James also lifted its HPE price target from $23 to $29.