Hewlett-Packard Enterprise (NYSE: HPE) has managed a solid total return in 2024 of 25% as of afternoon trading on Nov. 27. Hewlett-Packard Company spun out the technology stock back in 2015. The restructuring resulted in two separate companies: HPE and HP (NYSE: HPQ). HPE focuses on enterprise data and IT infrastructure solutions, while HP focuses on the company’s personal computer products and printers. HPE's focus makes it more exciting for many investors, considering the growing data centers and AI market.

Analysts at Raymond James are particularly bullish on HPE stock. They have a Strong Buy rating on HPE, with a $29 price target updated in mid-November. Compared to the stock’s Nov. 27 afternoon price of $20.75, shares would need to rise 40% to reach the target.

HPE: AI Systems See Strong Demand Despite Lagging Overall Growth

Revenues at HPE have largely stagnated over the past two years. Overall, total revenues in Q3 2024 are down slightly from those in Q1 2023. This holds true when looking at almost all the companies' individual segments. However, in recent quarters, the company's server business has grown fast. Server revenue growth hit 18% in Q2 and then 35% in Q3.

Much of this is being driven by demand for the company’s AI systems. AI-related products and services accounted for $1.3 billion of revenue in Q3. This is over three times more than what they generated in Q1. The company also has a strong AI systems backlog of $3.4 billion, indicating future revenue. Next quarter, HPE is expecting around a 13% increase in revenue from the previous year’s quarter. This would be an acceleration from the 10% rise in total revenue last quarter, a positive sign.

HPE GreenLake: The Cornerstone of Its Hybrid Cloud Shift

The company is also seeing strong adoption of HPE GreenLake. This IT infrastructure solution puts the hybrid cloud at the center. Made up of hardware and software, it connects a firm’s devices, data centers, and cloud applications. The platform lets companies store data, switch cloud environments, and access AI models and machine learning workloads. Since Q3 2023, the number of customers using HPE GreenLake has increased by 37%.

A key component of the platform is that customers can pick and choose which services they want within it, allowing them to spend only on what they need. This represents a significant shift in how the company provides IT infrastructure. The traditional model was mostly focused on hardware sales. But now, GreenLake generates 71% of its annualized revenue from software and services, creating a more “pay-as-you-go” model.

This is part of the reason why hybrid cloud revenue growth appears sluggish despite the strong adoption of HPE GreenLake. Companies recognize revenue more over time with services, whereas they recognize it immediately with hardware. As this shift continues, revenue growth in the hybrid cloud should improve in the coming quarters. The company sees modest revenue growth and a flat, slightly improving operating margin in the hybrid cloud in Q4.

One of the exciting services now offered in GreenLake is the HPE Private Cloud AI. It gives customers a dedicated cloud network for developing and deploying generative AI apps that best suit their needs. It was co-developed with NVIDIA (NASDAQ: NVDA). NVIDIA’s graphical processing units, networking solutions, and software power this part of the Greenlake platform. The company said it is seeing stronger-than-expected interest in the service, which was only launched in June.

Juniper Networks Acquisition

A key part of HPE's strategy is acquiring Juniper Networks (NYSE: JNPR). This will improve the networking infrastructure for AI workloads and hybrid cloud performance. This will create a more cohesive offering across HPE's hybrid cloud and server segments. It should boost the company's competitive edge and would likely drive strong demand.

Some worry that the Department of Justice (DOJ) might challenge the acquisition, asserting that the deal would unfairly reduce competition. The DOJ could decide very soon, but it may be delayed until the next presidential administration takes office. An official challenge by the DOJ would come as a big disappointment to the markets.

To me, waiting to see how this plays out is prudent. If the deal goes through, HPE will position itself very strongly across its offerings, which would be a reason to get excited about the stock.