Citi analysts upgraded Hewlett Packard Enterprise (NYSE:HPE) to Buy from Neutral on Friday, citing robust AI-driven growth and improving fundamentals.

The price target was raised to $26 from $23, reflecting optimism about HPE's position in the evolving enterprise tech landscape.

"AI server momentum continues to remain robust in 4Q24 results, with the company noting strength in AI systems, said Citi, noting that AI revenues surged over 300% year-over-year in Q4, reaching $1.5 billion.

Citi projects continued AI revenue growth of over 25% annually through 2026, supported by increasing enterprise adoption and innovations like liquid cooling technology.

The analysts highlighted HPE's deep pipeline, which includes $3.5 billion in orders post-Q4, underscoring its strategic positioning in private cloud AI solutions.

Networking recovery is another positive factor, with three consecutive quarters of order growth. While Q4 revenues were flat sequentially, Citi sees potential for further gains, particularly after the anticipated completion of the Juniper acquisition.

They believe the deal could drive up to 16% EPS accretion by FY26, bolstering HPE's margin profile and increasing networking's share of total sales to 25-30%.

Citi also said: "Hybrid cloud revenues grew 18% y/y and 22% q/q, and came in much better on expected on demand in private cloud and ongoing adoption of HPE Alletra storage."

Analysts noted that improving server demand and new AI-driven opportunities provide a foundation for sustained growth.

Citi acknowledges risks, including potential delays in the Juniper acquisition, supply constraints for GPUs, and competitive pressures.

However, the bank argues that HPE's growing AI presence, core market recovery, and favorable valuation—trading at an 11x forward P/E with a discounted multiple to peers—present meaningful upside.

"Even at a ~20% discounted multiple to peers, we see meaningful upside to shares," concluded Citi.