HPE stock jumps as Morgan Stanley upgrades AI infrastructure outlook

Hewlett Packard Enterprise HPE stock rose more than 4% on Monday after Morgan Stanley upgraded the company, citing continued strength in enterprise AI infrastructure spending and arguing that demand for servers and networking hardware remains resilient despite concerns about the sustainability of the AI investment cycle.

Morgan Stanley analyst Erik Woodring upgraded HPE shares to Overweight from Equal-Weight and raised his price target to $71 from $69.

The move came after HPE shares surged 130% this year and 169% over the past 12 months.

Despite the strong rally, Woodring noted that HPE continues to trade at 14.3 times expected earnings over the next 12 months, below the S&P 500's multiple of 20 times.

Morgan Stanley sees continued AI infrastructure demand

Morgan Stanley identified HPE as its preferred original equipment manufacturer for investors seeking exposure to the enterprise infrastructure cycle.

“HPE is our preferred OEM [original equipment manufacturer] to play the enterprise infrastructure cycle, offering an attractive risk/reward,” Woodring wrote in a research note.

HPE develops servers and networking equipment that support artificial intelligence workloads.

As demand for AI computing continues to expand, the company has benefited from increased demand for its hardware, while higher memory prices have also contributed to stronger pricing for its products.

Although investors have questioned whether the AI hardware spending boom can continue, Morgan Stanley believes current industry trends remain supportive.

“Admittedly, we have been on the wrong side of the enterprise hardware trade, previously believing that record component inflation would quickly stymie a recovery in hardware spending,” Woodring wrote.

He added that AI demand continues to offset concerns about rising component costs.

“Together, these dynamics are supporting stronger revenue growth, greater pricing power and further earnings upside across enterprise hardware,” he said.

AI spending and memory prices support growth

According to Morgan Stanley, enterprise customers continue to invest in computing and storage infrastructure as AI adoption accelerates.

Rather than delaying purchases, higher memory prices are encouraging customers to move ahead with infrastructure investments, supporting revenue growth for hardware suppliers such as HPE.

The firm believes these trends are strengthening pricing power across the enterprise hardware industry while creating additional earnings upside for companies exposed to AI infrastructure.

HPE stock traded around $55.50, extending a rally that has seen shares more than double since February.

HPE's rally this year has been notable enough that many retail investors have been tracking the stock closely through investment apps, alongside other AI infrastructure plays.

Morningstar forecasts further upside

Morningstar also maintained a positive long-term view on HPE, assigning the company a fair value estimate of $64 per share.

The research firm expects AI-optimized servers and growing demand for general-purpose servers driven by agentic AI applications to remain key growth drivers.

It also believes HPE's acquisition of Juniper could strengthen its networking business.

Morningstar forecasts HPE's AI-optimized server business will generate roughly $10 billion in revenue by 2028.

It also expects general-purpose server revenue to grow at a 16% compound annual growth rate over the next three years and projects networking revenue to expand at a 30% CAGR through 2028, with normalized margins reaching 27%.

The firm said additional upside could emerge if HPE's AI-driven growth accelerates further.

Morningstar believes its fair value estimate could rise to $70 if investors assign a higher valuation to the company's growth prospects, and $80 or more if AI-driven expansion continues at an accelerated pace.