HPE Raises FY26 Growth Outlook Amid Margin Pressures

Hewlett Packard Enterprise (NYSE:HPE) delivered a sharp acceleration in top-line growth, with total revenue rising 16.2% in the third quarter. The primary driver was the networking segment, which saw revenue expand by 75%. This performance coincided with a significant improvement in non-GAAP gross margin, which climbed to 16.2% from 8.5% in the prior period, indicating better cost control on high-growth products.

The company strengthened its forward outlook by raising fiscal year 2026 revenue growth guidance to a range of 34% to 37%. This upward revision signals management’s confidence in sustaining current momentum. Additionally, HPE reported $2.4 billion in AI orders for the quarter, an increase from $1.8 billion in the previous quarter, underscoring steady demand for its enterprise infrastructure solutions.

Margin compression in networking division

Despite the strong revenue growth, profitability metrics in the networking unit showed signs of strain. The operating profit margin for the nine months ended in the quarter fell to 22.4%, down from 25.1% in the previous period. This decline suggests that while sales volumes are increasing, the company is facing rising costs or pricing pressures that are eroding a portion of the gains.

Management noted that networking orders are growing three to five times faster than revenue. This disparity indicates a significant backlog, which may lead to delayed revenue recognition in future quarters. While this points to strong future demand, it also introduces timing risks that could impact short-term financial results.

Investor sentiment and valuation context

According to GN markets/earnings (en-US), HPE shares have risen more than 120% over the past year, outperforming peers like Dell and Super Micro in the AI hardware space. The stock has experienced volatility since the September 2 earnings release, swinging between gains and losses as the market digested the mixed signals of high growth and margin pressure.

Institutional interest in the company has intensified, with 85 hedge funds holding stakes in Q2, up from 58 in Q1. A notable entry was Point72 Asset Management, which established a $120 million position. Despite this accumulation, HPE trades at a forward P/E of 12.85, which is lower than Dell’s 20, suggesting the market may be valuing the two companies differently based on their specific AI product mixes.

Strategic positioning in AI infrastructure

HPE’s strategy relies on its ability to provide essential hardware for AI server buildouts. The 75% growth in networking revenue highlights the critical role of data center connectivity in its business model. As the company navigates the balance between rapid order intake and margin management, its valuation remains a key factor for investors assessing its long-term potential in the enterprise computing sector.