New Tech Pair Trade? Macquarie Ups HP Enterprise On 'Green Shoots,' Downgrades NetApp

In a new report, Macquarie analyst Rajesh Ghai discusses his divergent outlooks for two tech hardware stocks: Hewlett Packard Enterprise Co HPE and NetApp Inc. NTAP. According to Ghai, the low market expectations for Hewlett Packard combined with the run-up in NetApp shares may have the two stocks set up for a pair trade opportunity.

“While achieving FY16 FCF is still likely to prove a tall mountain to climb, we now believe given a higher proportion of US Federal contracts in HPE’s current ES book of business, sharp declines as seen in the last three years are unlikely, which could enable ES’s below pat margins to expand through [the] rest of the year,” Ghai explains.

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On the other hand, he notes that EMC Corporation EMC has been extremely aggressive with pricing, which means that it will be difficult for NetApp to gain share and grow its top line in coming years. Despite the company’s focus on cost-cutting, including workforce reductions, Ghai believes that NetApp’s 27 percent gain since late January has over-shot the stock’s true value.

Maquarie currently has an Outperform rating on Hewlett Packard Enterprise and had downgraded NetApp to Underperform. The firm values both stocks in the $20-22 range.

Disclosure: the author holds no position in the stocks mentioned.