Hewlett Packard Enterprise (HPE) stock is trading notably lower Tuesday after the technology company announced a $1.35 billion convertible stock offering.
According to a filing with the Securities and Exchange Commission (SEC), HPE will offer 27 million shares of Series C Mandatory Convertible Preferred Stock to raise $1.35 billion, the company announced after the market closed on Monday. It will also grant underwriters a 30-day option to purchase up to an additional 3 million shares, which would allow it to raise an extra $150 million.
HPE said it will use the proceeds from the offering to fund all or a portion of its pending acquisition of Juniper Networks (JNPR), which was announced in January, and to pay related fees and expenses. If any capital is left over, the company said it would be used for general corporate purposes.
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The news comes less than a week after HPE reported its fiscal third-quarter earnings results, in which it disclosed a 10% year-over-year rise in revenue to $7.7 billion and a 2% increase in its earnings per share (EPS) to 50 cents.
Why is Hewlett Packard stock lower?
Hewlett Packard stock is selling off on the news because when a company announces a stock offering, it often leads to a decline in its share price over concerns of dilution. A stock offering increases the number of shares available in the market and reduces the ownership percentage of existing shareholders. The dilution also negatively impacts a company's earnings per share since there are more shares outstanding.
A stock offering can also cause concern because it shows that the company needs additional capital and is willing to dilute existing shareholders to raise it.
Is HPE stock a buy, sell or hold?
Tuesday's decline has Hewlett Packard down nearly 6% for the year to date. Yet, Wall Street remains bullish on the tech stock.
According to S&P Global Market Intelligence, the average analyst target price for HPE stock is $20.96, representing implied upside of nearly 30% to current levels. Additionally, the consensus recommendation is Buy.
Financial services firm Argus Research is one of those with a Buy rating on the large-cap stock, along with a $26 price target.
"HPE has lagged the technology peer group for years based on slow EPS growth and even slower revenue growth," said Argus analyst Jim Kelleher in a September 6 note. "The stock trades at inexpensive current valuations, which, in our view, does not reflect potential for top- and bottom-line rejuvenation given the many ways in which HPE can participate in the artificial intelligence (AI) market.”
Argus' $26 price target sits nearly 60% above where HPE is currently trading.
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