Fundamental Weakness Is Evident Going Into HP Enterprise Q1 2016 Earnings

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Hewlett Packard Enterprise (NYSE:HPE) is in a really tough spot given the massive shift in public cloud and it doesn’t seem like this trend will abate in the near term. For the time being, HP Enterprise has been able to adjust to this environment of migrating the data center out of the enterprise and into public cloud by selling Industry Standard Servers. Of course, there are some drawbacks to this given the negative impact on profitability it has had, as they’re more like white box datacenter vendors who provide their large scale manufacturing capabilities for commodity like margins, which turns HP Enterprise into more of a commodity business model. Of course, they do provide some ancillary services, but the revenue pool around those services is quickly shriveling up as cloud-based apps, and various other third-party services like Windows and Linux Server suck dry the last remaining profit centers of conventional IT firms (Unix Middle Ware in the case of IBM and for Oracle (ORCL), Fusion Middle Ware).

Also read: Which of the two HP stocks should you own?

It’s really hard to like HP Enterprise given the massive value compression it has experienced. And no, unfortunately, the spin-off hasn’t created meaningful shareholder value, as the two separate companies are just as bad after their split. Competing firms have experienced multiple expansion in that same time frame (Microsoft MSFT, Google GOOG, and Amazon AMZN), whereas HP’s valuation continues to compress due to the weakness in investor sentiment and a pattern of short-sighted execution.

Here’s what HP Enterprise mentioned in their 2015 annual report: