X Server Win Demonstrates HPE's AI Potential

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Hewlett Packard Enterprise (HPE) has won a $1 billion deal to provide Elon Musk’s X social network (fomerly Twitter) with AI servers, advancing its push into a market area where it seems strongest—even as HPE maintains high hopes for its future in networking.

As reported by Bloomberg, HPE was chosen for the X deployment over competitors Dell Technologies and Supermicro, which both placed bids for the job. Dell’s and Supermicro’s servers populate Musk’s 100,000-GPU Colossus supercomputer in Memphis, Tenn., which is used to train its xAI Grok chatbot for X customers. Since both Dell and Supermicro have market share leads over HPE, according to Bloomberg Intelligence, the recent win could be a much-valued vote of confidence.

HPE's Liquid Cooling Featured

HPE may have been helped in the X proposal by its liquid-cooling technology, according to Bloomberg analyst Woo Jin Ho, though he also warned that large deals can negatively impact margins (more on that in a moment).

The liquid cooling was highlighted by HPE CEO Antonio Neri in the company's Q4 earnings call. He noted that HPE has paired its liquid cooling with its Ethernet-compatible Slingshot AI cluster fabric, which supports 400-Gbit/s data rates. "These innovations are enhancing the performance of our AI systems and supercomputing product lines, differentiating us from the competition," Neri said.

Liquid cooling and Slingshot fabric also are part of the ultrafast El Capitan supercomputer at the U.S. Department of Energy’s Lawrence Livermore Laboratory, another deal that testifies to HPE's competence in HPC.

HPE’s Role in a Growing Market

While it’s not clear exactly which servers are included in the X deal (HPE hasn’t commented publicly on the win), the vendor’s AI server portfolio covers its Cray supercomputers and enterprise-level ProLiant servers, as shown in the chart below:

Source: HPE Investor Relations

These servers are on an upward growth trajectory. Sales have grown approximately 275% since the start of 2024, according to HPE’s quarterly reports:

Source: HPE Investor Relations

If HPE can maintain solid growth, it can hope to take a slice of a market that Bloomberg Intelligence anticipates could grow 55% in 2025 to reach $252 billion.

HPE also showed strength in its server segment overall in the last quarter. Server sales were $4.7 billion, up 32% year-over-year (y/y), representing 55% of overall sales of $8.5 billion. Of the server segment, AI servers accounted for $1.5 billion, or nearly one-third of all server sales.

HPE AI Server Sales Weigh on Gross Margin

One caveat emerges: As Bloomberg’s Woo Jin Ho noted, a large order can eat into a company’s margins, and that’s not something HPE can easily afford. In the fourth quarter of 2024, which ended October 31, non-GAAP gross margin was 30.9%, down 390 basis points y/y and down 90 basis points sequentially. Since AI servers require expensive components from the likes of NVIDIA and AMD, their production can negatively affect gross margin.

HPE CFO Marie Myers acknowledged on the company's last earnings call that AI server sales had impacted gross margin, though another contributing factor was poor sales in HPE’s Intelligent Edge segment, which includes its Aruba products and other networking solutions. That segment reported $1.1 billion in sales, down 20% y/y. Myers said that closing HPE’s $14 billion merger with Juniper Networks should have a positive effect on gross margin.

But Is HPE’s Merger with Juniper a Distraction?

While the Juniper merger, which has stalled in the U.S. as regulators anticipate a new incoming administration, could improve profitability, it also has its own share of potential downsides, as Futuriom has noted in detail. For one thing, the extended delay in closing could be impacting HPE’s and Juniper’s ability to sell networking gear. In their latest earnings reports, both companies reported reductions in networking revenues overall, though Juniper reported 44% y/y growth in datacenter networking.

Are customers hesitating to buy HPE or Juniper equipment out of concern for how either company’s products might be affected post merger? It's tough to tell at this point. But at least one source said that large customers like hyperscalers are choosing alternative players while HPE and Juniper wait for the other shoe to drop.

"Hyperscalers are adopting NVIDIA, Dell, Edgecore, and Arista," said the source, who requested anonymity.

This trend is likely to continue after the merger, since it won’t be clear right away how well the companies can combine and synergize their technologies.

But one thing the recent news of HPE’s billion-dollar win does make clear: HPE has a solid foothold in AI servers. The Juniper deal could help or hinder that advantage, depending on the timing of the acquisition and on how well HPE handles the combination of its products with Juniper’s. How, for instance, will it leverage Juniper’s datacenter networking products alongside its own HPE Slingshot AI cluster fabric? We're eager to find out.

Futuriom Take: HPE has scored a $1 billion sale of AI servers to X, highlighting the company’s fundamental strength in its server segment. The company’s acquisition of Juniper Networks could distract HPE from this primary focus.