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HPE Closes CRAY Acquisition

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Hewlett-Packard Enterprise’s (HPE - Free Report) acquisition of supercomputer-maker Cray announced in May closed this week. The company will be paying $1.3 billion announced earlier plus $100 million for cash generated after the announcement). It’s a classic win-win deal with the following chief benefits-

HPE is the largest player in the high performance computing (HPC) segment (34.8% market share), followed by Dell EMC (20.8%) and IBM (IBM - Free Report) (7.1%). But the company’s position comes from relatively higher volumes of lower-end hardware. Cray, on the other hand, plays at the very high end, with a miniscule market share of 2.3%. Acquiring the smaller player helps HPE expand into the very high end of the market.

The deal also expands its customer footprint that has thus far been focused on enterprise and commercial, with limited government exposure. That’s not necessarily a bad thing in terms of business ups and downs, because government spending tends to be cyclical and lumpy, at least in comparison with the others.

But government contracts are the really big ones, such as the $100 million deal Cray has with the Argonne National Laboratory (to be delivered by 2021) and the $600 million deal it has with the Energy Department for the Oak Ridge National Laboratory (also to be completed by 2021).

Such big deals can really run up cost, which along with the cyclicality in the business can be hard for a small company to handle, especially in a market with some really big and increasingly competitive players. Cray hasn’t made profit since 2016 and its revenue and earnings pictures don’t look pretty:

 

So HPE buying out the company will be good for it. Not only can it shoulder much higher cost and withstand cyclical variations better, but it can also add relative stability to revenue flow by virtue of its commercial and enterprise exposure. And that’s in addition to its supply chain and manufacturing efficiencies, which can add value to Cray’s business. 

The technology that the two bring to the table will allow HPE to offer something like HPC-as-a-service on GreenLake, to customers looking for more computing power as they harness data analytics, machine learning, artificial intelligence, etc in operations.

For HPE, there are longer-term payoffs as well. While early days yet, companies like Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) and IBM are working on quantum computers for the next level of parallel processing. Some analysts think that Cray brings technology that HPE can build on to somehow address that market. Broad adoption of quantum computing is likely 15-20 years away, and some think that supercomputing of today will give way to it.

The current supercomputing technology enables massively parallel computing, which speeds up computing operations that can be split up. Quantum computing takes parallel processing to the next level, with its ability to take input from thousands more sources. Results also vary quicker because of the larger number of changing inputs. There are many other challenges involved in developing the technology, which is why it’s still something in the distant future.  

At any rate, we don’t have quantum problems to solve all the time. Some kinds of logical processing for example involve sequences, which therefore have to be linear. So in all probability, there will be simultaneous existence of varied systems to serve our varying needs.

HPE shares carry a Zacks Rank #3 (Hold). So pick a stock from the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here instead.

 

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