Are AI servers a feast or a valuation bubble? Evercore ISI downgraded HPE.US (HPE.US) rating to “on par with the market”, and the stock price plummeted by more than 10%

The Zhitong Finance App noticed that the stock price of enterprise technology infrastructure company HPE Technology (HPE.US) plummeted nearly 11% on Monday. The stock fell $6.68 to close at $55.41 after Evercore ISI downgraded its rating from “outperforming the market” to “equal the market” on the grounds that the risk-reward ratio had balanced after the sharp rise in the stock price.

This round of decline comes after HPE Technology surged more than 12% on the previous trading day, and trading of the stock recently fluctuated.

Evercore ISI recently downgraded HPE Technology's rating from “outperforming the market” to “equal the market”, believing that after the stock's recent rise, its risk-reward ratio has become more balanced. The agency maintained its target price of $65 and pointed out that progress in Juniper's integration, improved profit margins, and demand likely related to Helios are all factors that may drive its views to be more positive.

On September 2, the company reported non-GAAP earnings per share of $1.11 and revenue of US$12.2 billion, both higher than the agreed market expectations. Management raised the revenue growth framework for FY2027 to 13% — 17%, and expects free cash flow to reach at least $5 billion.

During the earnings call, management also indicated that supply restrictions on memory and wafer production capacity are expected to continue, and stated that gross margin will fall back to historical levels as the share of cloud and AI businesses rises.

Within two weeks of the announcement of the fiscal third quarter earnings report, Wall Street's rating adjustments to HPE Technology were implemented intensively. In the past month, at least 13 investment banks updated their target prices or ratings for this enterprise's technology infrastructure company, showing a rare “double stretch”: Bank of America pushed the target price to $88, a record high, while Wells Fargo cut it to 54 US dollars, hitting a street low. The huge gap between 88 and 54 is a real vote of the market over the AI server feast and gross margin concerns.

Upward camp: the order book is the best argument

The first wave of action after the financial report almost completely fell to the ground. Raymond James' Simon Leopold raised the target price from $74 to $86 and maintained a “buy” because AI server momentum continues and the contribution of traditional servers and storage is improving. Bank of America's Wamsi Mohan is even more aggressive: first raised the target price from $80 to $82 on August 31, then pushed the earnings report to $88 the next day, bluntly optimistic about the potential for AI-driven growth and profit margin expansion. Barclays Tim Long raised from $67 to $79, pointing out that the excess expectations for the third fiscal quarter came not only from server demand, but also from both improvements in sales prices and profit margins.

Citi's Asiya Merchant raised the target price from $74 to $76. She placed special emphasis on AI reasoning and agent-based AI workloads to drive a 42% increase in HPE's standardized order book, and expected that improved cash flow would increase the company's shareholder returns from the fourth fiscal quarter. Deutsche Bank, Truist, J.P. Morgan Chase, and Argus have also raised or maintained their buying ratings, with target prices concentrated in the $68-70 range. Morgan Stanley maintains an “over match” rating, and the target price was slightly adjusted between $67 and $69 — the agency had already raised the rating from an “even match” as early as mid-August.

Cautious camp: it's not that they are not optimistic; it's rising too fast

The action on the other end is just as intense, but it is mostly a restrained attitude of “cutting the target price and not downgrading the rating.” Wells Fargo's Aaron Rakers was the most decisive, drastically lowering the target price from $67 to $54 and maintaining “the same level as the market”, making it the lowest target price in the game. Piper Sandler fell to $57, UBS dropped to $59, and Susquehanna dropped to $62. All three remained “neutral” or “held”; KeyBanc also reaffirmed their holdings. And just this Monday, Evercore ISI went one step further, downgrading the rating from “outperforming the market” to “being on par with the market”, triggering HPE to plummet by nearly 11% in a single day to close at $55.41 — the latest footnote to this round of ratings differentiation.

The cautious logic is uncomplicated: HPE Technology's stock price has accumulated a cumulative increase of about 118% year to date, and the risk-reward ratio has narrowed markedly. The management also personally acknowledged during the earnings call that supply constraints on memory and wafer production capacity will continue; as the share of the Cloud & AI business rises, gross margin will fall back to historical levels. In other words, AI amplification is real, but amplification is not necessarily equal to profit.

The comprehensive TipRanks and MarketBeat data covers HPE Technology's 18 analysts, 12 “buy”, 1 “strong buy”, 5 “hold”, and none “sell”. The consensus rating is “moderate buy”. The average target price is $69.44, and there is still about 16% upside compared to the current price.