Key Points
Barclays downgraded Hewlett Packard Enterprise this week over growing skepticism about how quickly corporate customers will adopt artificial intelligence hardware.
Analysts warned that enterprise IT spending on AI remains modest, with memory component costs driving server revenue growth rather than new AI deployments.
The pullback highlights the vulnerability of the stock's expanding valuation after a massive rally over the previous 12 months.
A Wall Street downgrade questioning the timeline for corporate artificial intelligence spending sent Hewlett Packard Enterprise (NYSE:HPE) tumbling 20.2% this week.
Hewlett Packard Enterprise stock changed hands at $58.63 as of the close on Thursday, October 15, down 20.2% from Friday, October 9's close. Over the same period, the S&P 500 (SNPINDEX:^GSPC) slipped 0.9%, and the Nasdaq-100 was down 3.1%.
Wall Street casts doubt on enterprise AI timing
Analysts at Barclays downgraded Hewlett Packard Enterprise on Wednesday to the equivalent of a hold rating, citing concerns that corporate adoption of artificial intelligence hardware is taking longer than expected.
The firm noted that businesses currently allocate roughly 5% of their IT budgets to AI projects, suggesting that recent server revenue gains reflect higher memory component costs rather than a surge in enterprise AI deployments. The downgrade also hit sector peers like Dell Technologies (NYSE:DELL), which plunged 6.7% over the week.
Hewlett Packard Enterprise sells server hardware, data storage, and networking equipment to corporate IT departments and cloud providers, which use it to run data centers. The company had been riding a strong wave of server demand, with server revenue expanding 35% in its last reported fiscal third quarter, which ended July 31, 2026. However, the downgrade underscores that much of the recent top-line momentum stemmed from hardware price increases rather than from increased unit shipments among corporate customers.
Investors had pushed the stock higher on expectations that high-margin servers and networking gear would fuel multi-year earnings expansion. If corporate clients delay large-scale AI infrastructure commitments, profit margins could drift back toward historical averages as traditional server pricing normalizes.
This week's downgrade by Barclays sharpens concerns that enterprise AI hardware spending may take longer to materialize than Wall Street's lofty expectations implied.
What's next for Hewlett Packard Enterprise
The next major test for the company comes on Dec. 3, 2026, when management is scheduled to report fiscal fourth-quarter earnings. Investors will watch gross margins closely after adjusted gross margin reached 40% in the prior quarter, seeking evidence that server pricing power remains intact.
Hewlett Packard Enterprise stock trades at a trailing price-to-earnings (P/E) ratio of 29.2, above the peer average of 16.1, with Dell Technologies (NYSE:DELL) at 27.1, HP Inc. (NYSE:HPQ) at 11.6, and Super Micro Computer (NASDAQ:SMCI) at 9.6.
Investors will accept this premium only if demand for AI servers accelerates. With $6.2 billion in cash and short-term investments as of July 31, 2026, against $20.2 billion in total debt, including lease obligations, the balance sheet provides operational flexibility. However, any further delay in corporate AI spending leaves HPE's valuation exposed.
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Is Hewlett Packard Enterprise stock a buy?
No hypergrowth run lasts forever. Even the AI data center boom must slow down someday, and Barclays thinks the tipping point is approaching quickly.
That may be the case, and I understand if you're bracing for a harsh end to the AI surge. But HPE is positioned to do well even if the data center orders dry up in 2027.
I could talk about this all day, but let's focus on three key details:
- Last year's acquisition of Juniper Networks made HPE a giant in the enterprise networking space. The integration is running ahead of schedule, set to deliver stronger synergies with HPE's systems business than expected.
- The stock looks expensive from certain angles, but downright affordable with other metrics. Crucially, HPE trades at 17.9 times free cash flow on Oct. 16. Dell's ratio is 33.8x and SuperMicro is burning cash these days.
- The GreenLake hardware subscription service is a hard-to-copy competitive advantage, and HPE's customers typically sign multi-year contracts. That's a high-quality revenue stream, still in its early stages
Among these three pillars of my HPE thesis, the GreenLake service appears especially important. The subscription service provides a stable revenue platform in any market.
"GreenLake remains one of our greatest differentiators," CEO Antonio Neri said in the Q3 earnings call. "In Q3, the number of GreenLake customers grew 18% to 52,000, up from 44,000 a year ago."
Barclays may be right that enterprise AI is running behind schedule, but HPE's record backlog says customers are still placing orders faster than the company can fill them. A 20% haircut for a business targeting at least $5 billion in free cash flow next year looks like an overreaction to me.
Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends HP and Hewlett Packard Enterprise. The Motley Fool has a disclosure policy.