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Hewlett Packard Enterprise Rockets On Q1; Could It Reign In Cloud?

While investors applauded Hewlett Packard Enterprise ‘s first quarterly performance as an independent company — beating Wall Street estimates and driving its stock up more than 13% Friday — some analysts and owners are pushing CEO Meg Whitman to compete harder. That means more aggressively taking on cloud enterprise leaders Amazon ( AMZN ) and Microsoft ( MSFT ), and buying up software  rivals such as  Workday ( WDAY ) or Salesforce.com ( CRM ), rather than directing cash to shareholders. “I think we need to give Meg a chance to see if she can take advantage of the opportunities in servers with the cloud migration led by Amazon Web Services, Alphabet ‘s ( GOOGL ) Google and Microsoft on the service and software side,” said Daniel Morgan, vice president of Synovus Trust, which holds 251,971 shares of HPE, in a Friday interview with IBD. “Further, the 54% year-over-year growth in the Q1 2016 quarter in networking allows HPE to build more momentum in this space” vs. rivals Cisco Systems ( CSCO ) and Juniper Networks ( JNPR ), he said. “And finally as we discussed before, the huge opportunity to expand the software unit with its 17%-plus operating margins (enables) a large acquisition in the cloud space. Right now software is just 8%-10% of total HPE revenues.” Buying enterprise software rivals Salesforce or Workday specifically is “a chance to make that unit significant by bringing it up to 20%-25% of revenues,” he said. “Post-split, Hewlett Packard Enterprise was supposed to be the growth portion of the Hewlett-Packard Co., (creating) a reinvigorated growth company.” Nevertheless, happy with HPE’s earnings performance issued after Thursday’s market close, investors bid up its stock up 13.5% to close at 15.44 in the stock market today . That’s less than 3% below its Dec. 1 high since splitting from its parent Nov. 1. For now, HPE stockholders interested in growth of any kind will need patience because the company is still shrinking, despite the slight Q1 beat. Hewlett Packard Enterprise reported earnings of 41 cents per share in the fiscal Q1 ended Jan. 31, on sales down 3% to $12.72 billion vs. pro forma figures from a year earlier. The results slightly beat the average view of analysts polled by Thomson Reuters, which called for EPS of 40 cents on sales of $12.68 billion. The non-GAAP 41 cents EPS is down from 47 cents a year earlier. (However, if HPE had been a standalone company at the time, Q1 2015 adjusted EPS would have been 44 cents, the company said in a March 1 note.) That’s pretty much as planned, with HPE not projecting much growth until fiscal 2018. For Q2 ending in April, HPE expects EPS ex items of 39 cents to 43 cents.  Analysts polled by Thomson Reuters expected Q2 EPS ex items of 42 cents on sales of $12.297 billion before Thursday’s earnings release, but on Friday, the revenue consensus was revised up to $12.332 billion. For the entire fiscal 2016 ending Oct. 31,  analysts  polled by Thomson Reuters projected $1.87 EPS ex items for fiscal 2016 ending Oct. 31, on revenue revised up Friday to $50.805 billion. HPE earlier had modeled $50.81 billion in revenue in fiscal 2016, down 2.5% from a $52.12 billion pro forma in fiscal 2015. The slightly smaller half of the old Hewlett-Packard Co., now called HP Inc. ( HPQ ), kept the legacy PCs, printers and ticker. HP Inc. lifted 0.6% to 11.18 Friday. Hewlett Packard Enterprise kept the enterprise software, servers, networking and financial services businesses. “Backing Up The Truck” To Buy HPE Stock To encourage patience among Hewlett Packard Enterprise shareholders, CFO Tim Stonesifer said HPE will “return at least 100% of our free cash flow outlook to shareholders” in fiscal 2016, after devoting $1.3 billion to share repurchases and dividends in Q1. In “addition,” Stonesifer said, shareholders will receive a “majority” of proceeds from the sale of a 51% stake in its Chinese server and storage business to Tsinghua Holdings, valued at $2.3 billion at the time the deal was announced last May. The transaction was supposed to be done by February, but Whitman said regulatory delays have pushed back closing to May, after which the cash will flow to shareholders. To UBS analyst Steve Milunovich, who complained in the post-earnings-release conference call that HPE shares were priced too low, Whitman chuckled: “We appreciate that, which is why we’re backing up the truck” to buy back more shares, which helps boost the price. Avoiding “Frankenstein Of Architecture” Whitman advised analysts that by investing internally and encouraging organic growth “you don’t end up with a Frankenstein of architecture” as the company would risk doing by  growing through acquisitions. She cited HPE for pursuing both paths. “Our innovation engine is firing on all cylinders, and you’re going to see some amazing new introductions in the coming quarters in key areas of the portfolio, including servers, cloud, high-performance computing, IoT (Internet of Things), all-flash storage, Aruba and converged systems.” Aruba Networks is a networking leader in mobile enterprise that the old Hewlett-Packard agreed to buy last March for about $3 billion, strengthening the new HPE’s rivalry with Cisco Systems and Juniper Networks. As for “taking advantage of the disruption in the marketplace,” Whitman said, “we learned a lot about how to do this in the context of IBM’s ( IBM ) sale of their server business to Lenovo. … We have a big opportunity to go take (merging) Dell and EMC ( EMC ) business, much as we took a lot of the Lenovo business that would have gone to Lenovo.” She told CNBC on Friday that “in the last quarter, we had about 107 deals that we actually took from Dell/EMC.” She also told analysts that HPE has become the “leading infrastructure provider for SAP ( SAP ) HANA (application server) with nearly twice the number of shipments over the next competitor.” In the cloud, she said, “following a major wave of product releases across our HPE Helion portfolio in the second half of 2015, we are seeing strong customer traction. In fact, since separation, Helion has gained over 200 customer wins, including some of the world’s largest banks, service providers and industrials.” It just wasn’t enough for Needham analyst Richard Kugele, who chided the company in a research note issued Friday, arguing that the $2.3 billion windfall from Tsinghua should be spent on organic or M&A growth, not shareholders’ short-term benefit. “We had hoped that post-split, HPE would be able to focus on getting its house in order and leverage its cash and balance sheet to buy/invest in solutions that solve their product gaps,” Kugele said. “Instead, the company seems intent on continuing financial engineering by doubling its cash return to shareholders (including the pending Tsinghua cash). In our view, this creates no sustainable value for the company or its investors but merely provides a floor for the stock during a period of poor enterprise spending. “With no material growth, revenue improvement or product strategy to build a buy thesis around, we reiterate our hold rating on the stock.” Said Morgan, the Synovus Trust portfolio manager who wants to give Whitman time to execute: “I did hear HPE management touting its share repurchases and FCF (free cash-flow) generation capability on the call. And this is very reminiscent of when Mark Hurd was leading HPQ  (the former Hewlett-Packard Co.) and grew the share price through financial engineering and not new product growth.” Hurd is now co-CEO of Oracle ( ORCL ), one of HPE’s toughest software rivals, and another legacy giant growing slowly.  

Surveys Show Netflix Winning In U.S., Slow Going In Japan

Consumer surveys show that Netflix ( NFLX ) continues to make subscriber gains in the U.S. but is having a rough time penetrating the market in Japan. RBC Capital Markets surveyed over 1,000 Internet users in the U.S. and over 1,500 in Japan in February about their streaming video usage. The U.S. survey found that 53% of Internet users now use Netflix to watch movies and TV shows, up from 51% in November. By comparison, 46% use Alphabet ’s ( GOOGL ) YouTube and 27% use Amazon.com ( AMZN ) to watch videos. The survey also found near record-high satisfaction levels and near record-low churn. Some 70% of Netflix subscribers say they are “extremely” or “very satisfied” with the service, the second highest level in 18 quarterly surveys and up from 69% in November. Plus, 72% of Netflix subscribers say they are “not at all likely” to cancel, though down from 75% in November. In RBC’s first Netflix survey in Japan, it found that just 1% of respondents use Netflix to watch movies and TV shows. That compares with 39% for YouTube, 13% for Nico Nico & GYAO!, 7% for Amazon and 5% for Hulu. Netflix entered the Japanese market on Sept. 2. RBC analyst Mark Mahaney reiterated his outperform rating on Netflix stock with a price target of 140. Netflix stock was up 3.5% to above 101 in late afternoon trading on the stock market today . Mahaney believes Netflix can climb to 180 million subscribers worldwide by 2020. It ended 2015 with 74.76 million total streaming subscribers, including 44.74 million in the U.S. “We believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn’t currently reflected in its stock price,” Mahaney said. RELATED:  Netflix Growth Potential Underestimated, Analyst Says .

Netflix Retakes Key Level; Apple On Biggest Win Streak Since Sept.

Loading the player… Netflix ( NFLX ) stock has been flying under the radar somewhat, as its performance has lagged over the past few months. But as the market and leading tech stocks continue to recover, the streaming video service is looking to retake a key level in a bullish manner in the stock market today . Netflix on Friday received an upbeat analyst report from RBC Capital Markets, which said that its quarterly survey showed record Netflix viewership. RBC also said half of the respondents felt Netflix had improved its content in the past year. Shares closed up 3.7% in fast turnover, retaking the critical 50-day line and the 100 price level in intraday trade. After hitting a nine-month low around 80 about a month ago, shares have steadily rebounded in quiet trade. Netflix still needs to retake its 200-day line and is trading about 24% below its all-time high reached in early December. Similarly, Apple ( AAPL ) was able to retake its 50-day line and the 100 price level on Tuesday. Apple posted its fourth gain in a row. Apple hasn’t seen consecutive positive action like that since last September. Alphabet, Amazon, Facebook Face Resistance Meanwhile, Google owner Alphabet ( GOOGL ) retook its 50-day line on Tuesday but has since retreated from that level. Alphabet is trading 9% below its February high. Amazon ( AMZN ) looks to be hitting resistance at its 50-day line for a third day in a row. Amazon is trading about 17% below its all-time peak reached in late December. And Facebook ( FB ) is hitting resistance near the 110 price level. Shares broke out past a base with a 110.75 buy point in late January, but the stock quickly turned tail. Facebook is now trading 7% below its high reached during that breakout attempt.