Like Dell, now HPE is going big. Yes, business is that good
It’s happened again — this time with Hewlett Packard Enterprise. Shares rose nearly 25% after the company reported a second-quarter 2026 blowout on strong data center demand. Like Dell, HPE stock’s response seems justified, given the larger upside outlook. The Street was looking for full-year earnings per share (EPS) of $2.42. That was understandable because previous EPS guidance was between $2.30 and $2.50. Surprisingly, HPE management went from $3.35 to $3.45, while giving a positive early comment about the 2027 fiscal year. At midpoint, the new guidance represents a nearly 42% increase in HPE’s earnings per share outlook. The market thought HPE was trading at around 19.6 times based on the previous 2026 earnings estimate – but looking back, based on the new numbers, it was actually trading at just 13.8 times. Even if its price rises to around $59, the stock is currently trading at around 17.4 times 2026 earnings, still below the pre-press estimate. Following Dell’s earnings last Thursday evening, shares rose nearly 33% the next day, another nearly 11% on Monday, and about 2% on Tuesday. Dell and HPE compete. Both make servers, storage, and networking gear. Both are riding the big wave of demand for data center infrastructure to use artificial intelligence. We have to admit that chasing moves like this is not our style, and when it comes to investing, sticking with the behavior that keeps you in the game for the long term is the most important thing. However, it’s hard to argue with the upside of some of these stocks. If you are going to enter HPE, parabolic motion is a dangerous game. There’s a lot of hot money in HPE right now. Valuation is certainly interesting, but that doesn’t always matter to those who have just made a lot of money in a short period of time. That, along with position management by professional portfolio managers, is a factor to consider. It’s hard to call these stocks a bubble, as they’re making this move toward a better EPS estimate. So, the question becomes, are we in an income bubble? That is, are companies seeing incredible profits from AI that will ultimately prove unsustainable? While data center hardware has historically been a boom/bust business, the bull case now is that HPE and its competitors have worked to slow that cycle. The only way to bet on stocks is to bet against the assumption that the income profile has changed. Whether he has it or not is irrelevant at this point because there is no way to prove it. It’s one of those things that bulls and bears can fight over. We will only know in retrospect as future locations are released. For now, it looks like this market has room to operate, as long as geopolitics doesn’t get in the way. During HPE’s post-earnings call, CEO Antonio Neri was asked how the company could raise its outlook so much since only three months ago, the guidance was so aggressive. Neri said it comes down to accelerating the need to support Agentic AI, those platforms that solve problems and perform tasks without human intervention. He added that customers are concerned about getting what they need and “don’t wait for things to improve” with memory prices – so, they just order. Bears can say whatever they want about bubbles and/or historically mispriced bike companies as investors. As it stands now, we’re seeing 20% to 30% upward movement remaining in the movements we’re seeing in the upper income revisions. HPE is a recent example, with its 42% EPS guidance increase and 25% stock rally. The share price bubble argument doesn’t hold up yet, as valuations have, surprisingly, stagnated or declined slightly due to earnings growth. Also, HPE’s figure of 17.4 times less than 19.6 times for pre-print iteration. As for the potential financial bubble, calling it burst will require a call when data center money stops working, or at least slows down. With the offerings we’ve seen from Dell and HPE, heard from Nvidia at Computex, and expect from the upcoming public offerings (IPO) of SpaceX, OpenAI, and Anthropic, the demand for computing power will only grow. Gradually, it has become clear that those mega IPOs can weigh on the market as investors decide to hold on to existing stocks to buy these hot new stocks. But those market forces do not detract from the underlying issue. Money continues to flow into AI infrastructure, which will support the earnings of companies like Dell, HPE, and startups. Betting against this trade, at least for now, could be your ticket to the grave. (Jim Cramer’s Charitable Trust is long NVDA. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling stock in his charity portfolio. 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