Hewlett Packard Has a Big Amazon Problem

HPE’s new efforts are showing growth, but Amazon looms from CNBC.

I joined CNBC this evening to chat about Hewlitt Packard Enterprise’s (HPE) latest earnings announcement.

Hewlitt Packard Enterprise investors got some much-needed good news today, as the company beat third quarter estimates. Shares are up over 4% after hours. Earnings came in at 31 cents per share, better than the 26 cents expected by analysts. Revenue also beat by a wide margin, $8.2 billion vs. an expected $7.5 billion.

Importantly, “future HPE,” or HPE minus its software group, saw sales rise 6%. Sales growth has been hard to come by in recent quarters, so this was welcome.

But let’s not get too carried away here; “less bad than expected” would be more accurate than “better than expected.” Margins continue to sag (operating margins declined from 9.9% to 8.4%) and the outlook for the remainder of the year wasn’t exceptionally rosy. This is a case of a company beating bad expectations.

HPE is in a tough spot here. The traditional server market is no longer growing. 2nd quarter industry-wide numbers aren’t available yet, but shipments were down 4.2% in the first quarter (according to Gartner) after being down big in the fourth quarter as well. Some of this is due to difficult comps, but let’s not miss the elephant in the room: Amazon’s AWS.

With virtually all growth going to Amazon and Microsoft’s respective cloud services, Hewlett Packard Enterprises is left to duke it out with Dell and IBM to grow market share in a no-growth market. That’s a terrible place to be.

So, the simple answer is that HPE needs to compete in the cloud. But that is now far easier said than done with Amazon, and to a lesser extent Microsoft, having the first mover advantage. Jeff Bezos has repeatedly said, “Your margin is my opportunity.” To say he is a worthy adversary is an understatement.

So, if computing is moving away from traditional enterprise computing setups and into the cloud, couldn’t HPE focus on selling directly to Amazon or Microsoft?

No. Both companies tend to build their own hardware using commoditized parts. There is no reason for them to pay up for a brand name like Hewlett Packard.

HPE is really pushing its “hybrid” model, which allows enterprise users to move data needs between local servers and the cloud. It’s an interesting concept, and I expect they’ll get some amount of traction from it. But this is something that very large enterprises are already doing for themselves, so their market here is small and midsized companies who might prefer the simpler solution of going all-cloud. I would be cautiously optimistic here, but this is far from a slam dunk.

HPE has a rough road in front of it and, barring major change, likely faces a slow road to irrelevance.

Disclosures: None.

On CNBC: Explosive Growth in Chinese Parcel Delivery

Parcels delivered figure in ZTO express earnings stands out: CIO from CNBC.

I joined CNBC last night to chat about ZTO Express (ZTO) earnings.

Emerging markets have had a really rough time over the past few years, due to weak demand from The US and Europe, slower growth in China, weak commodity prices, the threat of populist anti-trade politicians and a host of other issues. But around the beginning of this year, things finally stopped getting worse. Emerging markets in general are showing signs of life, and China in particular is looking good. Chinese GDP growth rates had been trending lower since 2010, but they’ve been rising since late last year. Growth in Chinese parcel volume would have been very strong even without this recent uptick in growth as more and more Chinese commerce moves to the internet. Adding some better than expected economic growth only makes this trend stronger.

The U.S. is a mature economy with the most established e-commerce economy, and even here parcel rates are growing at roughly twice the rate of GDP as more and more shopping moves online. Imagine how much more potential a company like ZTO has in China, which is both growing at a much faster rate AND has less developed e-commerce infrastructure.


Amazon (AMZN) is a tough competitor anywhere they go because they’re willing to operate at a loss (or close to it) in order to grow and build market share. Alibaba (BABA) has advantages over Amazon in that it is the first mover and has a long history navigating a market, China, that a lot of Western companies have a hard time navigating. Amazon is still little more than a bit player in China at this time. But like I said, Amazon is a brutally tough competitor, so Alibaba had better stay on its toes.

The larger question is what does this mean for the parcel industry. Amazon made big news last year announcing plans to massively increase its logistical presence in China, and Alibaba has been growing its empire as well. This makes all the sense in the world. A UPS strike or some sort of logjam that delayed delivery would be disastrous for Amazon and completely outside of its control. By building out its own infrastructure (in the U.S., China, or anywhere else) Amazon reduces a major risk and maintains better control.

If you’re currently delivering packages or handling logistics for Amazon or Alibaba, you have to be worried about them eventually cutting you out. It’s worth noting that Alibaba accounts for 70% of ZTO’s parcel volume. That’s huge concentration with a single customer.

For now, the total deliveries are growing at a fast enough rate to accommodate everyone. Last year, Jack Ma commented that he expected parcel deliveries to grow by a factor of 10 over the next 8 years to more than a billion packages per day. Even if growth ends up being only half that rate, that’s still phenomenal growth.



Without Obamacare Reform, What’s Next For Health Insurers?

I chatted with CNBC on the prospects for health insurance stocks now that Obamacare reform is off the table. The market seems to be pricing in a rosy scenario in which health insurers can continue to pass on rising costs indefinitely. I’m not so sure. At some price — and for many Americans, that point has already passed — health insurance makes no economic sense. You’re better off taking your chances and going uninsured.

And while President Trump is currently saying he’s comfortable sitting back and allowing Obamacare to fail on its own, I’m not so sure about that either. Trump lacks the patience for that. I think it’s far more likely he intervenes, possibly with price controls. Clearly, nothing like that is priced into current stock prices.

On CNBC: Yum! Brands’ Growth All About Taco Bell

Yum! Brands’ (YUM) results were broadly positive, driven mostly by success at Taco Bell. EPS came in at 65 cents per share, about 8% higher than analysts’ estimates and up 17% from last year. Yum also beat revenue estimates, though by a smaller margin.

Leading all of this was Taco Bell’s exceptionally strong performance, which offset significant weakness at Pizza Hut. Taco Bell same-store sales were up a whopping 8% and foot traffic was up 5%, which is extremely impressive for a mature brand in a stagnant industry like fast food. It’s also worth noting that Taco Bell is almost exclusively an American brand, as it has very little in the way of an overseas presence. So the bump can’t be attributed to a recovery overseas. This is very much a domestic American story.

So, even though older fast food brands have lost ground to higher-end “fast casual” chains like Chipotle (CMG) over the past decade, Taco Bell has managed an impressive comeback.

Yum – and particularly its Taco Bell brand – has really followed the lead of McDonald’s (MCD) in shaking up its menu, which had gotten a little stale. Just as McDonald’s introduced all-day breakfast and other assorted menu items, Taco Bell launched its Naked Chicken Chalupas in which the taco shell is actually made out of fried chicken.

While that sounds a little like Frankenstein’s monster, it’s been a major success, likely due to its novelty appeal.

Going forward, Taco Bell is looking to compete at the higher end with the likes of Chipotle while also continuing to offer cheap offerings for a dollar or two. It’s ambitious, but it seems to be working.

Taco Bell currently makes up about a third of Yum’s operating profits and has the best longer-term growth potential due to its smaller international footprint.

All of that is the good news. The bad news was Pizza Hut’s results. Same store sales were down 3%… and 7% in its US locations. That’s particularly sobering considering that Dominos Pizza and Papa John’s both had very decent quarters.

Sometimes, brands just get stale. Yum spend a lot of money refreshing KFC, and they’re attempting to do the same with Pizza Hut, pledging to spend $130 million helping its franchisees update their locations and improve their technology.

It’s needed badly. Dominoes mobile ordering is a fine-tuned machine, whereas Pizza Hut’s has been generating a lot of customer complaints.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management.