Hewlett Packard Enterprise HPE shares have gained 38% in the past year, outperforming the Zacks Computer and Technology sector and S&P 500 index’s return of 27.5% and 24.5%, respectively. Shares of the company have also outperformed the Zacks Computer - Integrated Systems industry’s decline of 4.3% in the past year.

However, following the recent lawsuit filed by the U.S. Department of Justice (DOJ) to impede Hewlett Packard Enterprise’s $14 billion acquisition of Juniper Networks Inc. JNPR, investors reacted nervously, causing the stock to plunge 2% on Jan. 30.

HPE was in the process of acquiring Juniper Networks in an all-cash transaction for $40 per share. This acquisition was put in place to scale Hewlett Packard Enterprise’s networking business, so the company could offer next-generation AI-native networking and enable new digital experiences with improved connectivity. This acquisition, which was scheduled to close in early 2025, has now been impeded by the DOJ.

DOJ’s Obstruction to Merger Hurts HPE

DOJ has put forward its case by stating that the HPE-Juniper merger would undermine the competitive fabric of the networking market by reducing the number of market players. At present, HPE, Juniper Networks and Cisco CSCO cumulatively hold about 70% of the networking market share.

Hewlett Packard Enterprise 1 Year Price Performance Chart

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DOJ fears that the merger would eliminate competition, lower prices and stifle innovation as it will consolidate the market by reducing the count to two large players like HPE and Cisco commanding 70% of the total market share. In response to the DOJ's claims, HPE stated that there are eight companies competing in the $180 billion networking market, including Arista Networks Inc. ANET and Fortinet Inc.

Both Arista Networks and JNPR compete in the networking market with products like networking switches, routers and cloud networking. While Arista develops Arista 7000 Series, 7300 Series, 7500 Series and 7800 Series switches, Juniper manufactures EX Series, QFX Series, EX2300, EX3400, EX4300, EX4400 and EX4600 switches. Routers like Arista 7800R4 Series, 7500R3 Series compare with Juniper’s MX Series, PTX Series and ACX Series routers. Fortinet also has offerings like FortiSwitch for wired and wireless networks.

HPE's Efforts to Coax the DOJ for Brighter Prospects

HPE’s revenues are projected to grow in single digits in fiscal 2025 and 2026. The Zacks Consensus Estimate for fiscal 2025 and 2026 revenues are expected to grow 7.5% and 5%, respectively. The acquisition of Juniper Networks will not only enrich HPE’s portfolio with infrastructure, operating system, security, software, AI and services, it will also boost HPE’s top-line growth rate.

In the fiscal 2024 annual report, HPE reported that the charges related to acquisitions and other activities increased $135 million, mainly due to costs from the pending acquisition of Juniper Networks. As the acquisition process continues, these charges are expected to rise further and this recent impediment from DOJ will incur rising costs.

As HPE has a lot to lose from the delayed acquisition of Juniper Networks, executives from both companies are discussing with Justice Department antitrust enforcers regarding the concerns about the deal. One piece of good news for HPE’s investors is that the merger has received approval from the European Union the U.K. Competition and Markets Authority regulators.

GreenLake and AI Still a Bright Spot for HPE

Amid all these regulatory challenges, investors remain concerned about potential setbacks for HPE. However, it is important to remember that HPE’s rally over the past year has been driven by strong performance in its key segments, particularly GreenLake and AI systems.

There is significant momentum in the adoption of HPE GreenLake as organizations are capitalizing on the flexibility and scalability of this IT transformation solution. GreenLake’s customer base expanded by approximately 34.5% year over year, reaching 39,000 in the fourth quarter of fiscal 2024. This growth in customer base has driven the annualized revenue run rate, which has increased 48% year over year, exceeding $1.9 billion at the end of the fiscal fourth quarter.

Hewlett Packard Enterprise continues to see robust demand for its AI system offerings. In the fourth quarter of fiscal 2024, HPE reported that it had $6.7 billion in cumulative orders for AI products and services since the first quarter of fiscal 2023. HPE’s new AI orders in the fiscal fourth quarter of 2024 have brought its backlogs to a value of $3.5 billion.

Conclusion: Hold HPE for Now

The regulatory hurdle in the acquisition of Juniper Networks comes with challenges like rising costs and delayed revenue recognition. However, HPE’s GreenLake and AI-driven growth signal promising long-term potential.

Considering these factors, investors should retain this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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