HP Enterprise may be an underrated AI play, and new deal with Nvidia could help

By Therese Poletti

CEO Antonio Neri says company's history shows it knows 'how to run AI systems at scale'

Hewlett Packard Enterprise, which has seen its stock lag other rival hardware-AI plays, believes its expertise in working with big corporate customers will give it an edge.

On Tuesday, HP Enterprise (HPE) unveiled a partnership with AI star chip-maker Nvidia Corp. (NVDA). The two will offer a suite of co-developed products for companies to quickly adopt generative-AI systems in a private-cloud configuration. HPE announced the partnership at its Discover conference in Las Vegas, where its President and Chief Executive Antonio Neri will be joined by Nvidia CEO Jensen Huang onstage at the Sphere.

"HP is uniquely positioned in that intersection, between training and this type of customer," Neri told MarketWatch, referring to large corporate enterprises. "Because of our supercomputer heritage, we know how to run AI systems at scale." In 2019, adding to its own high-performance computing offerings, HPE bought supercomputing pioneer Cray Research.

Neri said that corporate customers want to create their own internal, private AI systems, based on their own data. Working with HP and Nvidia, they can start out with large language models pre-trained on public data from privately held OpenAI or Nvidia, and use them to train on their own data, in a secure private cloud.

"They're going to bring it in to a location where they can give context to that model with their data," Neri said. "And that's what I call the fine-tuning, or retraining, of the model, right with their own private data."

In addition to hardware and software, HPE also has services to help its customers, which could eventually help profit margins in this increasingly competitive arena.

As the AI boom has reinvigorated some segments of the hardware industry in the past year - particularly semiconductors - investors have recently become concerned about the competitive aspect of the AI-server market.

Earlier this month, in the quarterly financial results of both HPE and Dell Technologies Inc. (DELL), strong sales were offset by weaker gross margins. HPE shares, though, had their best-performing day ever, jumping 15% after earnings thanks to its AI-server sales, even as some analysts voiced concern about margins.

Also read: HP Enterprise finally gets an AI bump, but server margins are a concern.

"Results and commentary point to low AI-server margins (less than 10% gross margins), consistent with Dell," wrote Bernstein Research analyst Toni Sacconaghi, in a note to clients.

Raymond James analyst Simon Leopold, though, wrote that he believed a higher mix of HPE's services offerings would help keep its server operating margins steady, at around 11%.

Servers remain a competitive arena, even amid the seemingly unstoppable demand. In addition to vying for allocation of Nvidia's expensive graphic processor units (GPUs), server makers need to distinguish their products, whether by price or differentiating features.

Earlier in the reporting season, Super Micro Computer Inc. (SMCI) CEO Charles Liang told analysts that in order to gain more market share in the AI-server market, "we may have to be a little more aggressive in pricing."

Super Micro, another leading AI play in the past year, has also distinguished itself early on by offering its expertise in direct liquid cooling, which will soon become essential in data centers running the most advanced AI servers.

Liquid cooling is more cost-efficient than air cooling in data centers, especially ones running AI, where power consumption is becoming a costly and problematic issue. If the semiconductors, especially GPUs, run too hot they will slow down and not run at peak performance.

HPE believes it has an edge with its long expertise in liquid cooling. The company has more than 300 patents in the area of direct liquid cooling, Neri said. One of its offerings is an alternative rack-cooling system, which allows customers to have air cooling and liquid cooling next to each other in the same row in the same data center, without having to do a costly retrofit.

Neri said the company's partnership with Nvidia will help "accelerate the generative-AI industrial revolution."

Not everyone on Wall Street is convinced, though, that HPE will continue to see sustained strong demand for its AI servers beyond fiscal 2024. And Sacconaghi of Bernstein said that he fears the impending closure of HPE's acquisition of Juniper Networks (JNPR) could be a distraction.

"We further worry that the company could be inwardly focused for the next one-two years preparing for and integrating the acquisition, which may present opportunities for competitors (most notably Dell in our coverage universe)," he wrote.

Neri said Juniper will complete the company's entire suite offerings as part of its hybrid cloud strategy. "This is the first time the company will own the silicon, the software, the infrastructure and the services from the edge all the way to the cloud and in between data center," he said.

HPE still has to further prove itself to investors. But it appears to be off to a good start.

-Therese Poletti

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06-18-24 1230ET

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