Hewlett Packard Enterprise Company (HPE Quick QuoteHPE - Free Report) saw its stock tumble by 8.5% on Tuesday following the announcement of a $1.35 billion stock offering to fund its pending acquisition of Juniper Networks, Inc. (JNPR Quick QuoteJNPR - Free Report) . The offering involves the issuance of mandatory convertible preferred stock, which has raised concerns among investors about potential earnings dilution and a deviation from HPE’s earlier plan to fund the deal through cash reserves.

This sharp drop has made investors wondering about whether to hold onto Hewlett Packard Enterprise stock, given its attractive valuation multiples compared to the broader market.

Earnings Dilution Fears Trigger HPE Stock’s Sell-Off

The decline in Hewlett Packard Enterprise’s stock price is directly tied to concerns over earnings dilution. The issuance of 27 million shares of Series C Mandatory Convertible Preferred Stock introduces future dilution since these preferred shares will eventually convert into common shares by September 2027.

This stock offering is in stark contrast to Hewlett Packard Enterprise’s initial statement that the Juniper Networks’ acquisition would be funded using its cash reserves. The sudden shift toward issuing preferred shares has created uncertainty about how the company plans to manage its liquidity and financial obligations. Moreover, the introduction of preferred stock means that dividends must be paid to preferred shareholders, further pressuring the company’s cash flow until the shares are converted into common stock.

Mandatory convertible preferred stock offerings often raise red flags for investors because they dilute existing shareholders' equity, and in Hewlett Packard Enterprise’s case, this is likely to weigh on its earnings per share (EPS) in the coming years.

Juniper Acquisition to Drive HPE’s Growth

While the stock offering has spooked investors, the acquisition of Juniper Networks is strategically vital for Hewlett Packard Enterprise. Juniper Networks brings artificial intelligence (AI)-powered networking solutions that will significantly enhance HPE’s edge-to-cloud offerings. As more businesses adopt hybrid cloud models, the demand for secure, high-performance networking solutions is only expected to grow, and Juniper Networks’ expertise in this area makes it a valuable addition to HPE’s portfolio.

The deal will allow Hewlett Packard Enterprise to integrate Juniper Networks’ AI-driven automation and security tools into its GreenLake platform, boosting the company’s ability to deliver cloud-native, AI-enabled services. Juniper’s robust customer base, particularly in data centers and cloud service providers, provides a new avenue for growth and cross-selling opportunities for HPE.

Moreover, the acquisition is expected to be accretive to Hewlett Packard Enterprise’s margins, given Juniper Networks’ high-margin business model. The networking sector has been a high-growth area, and JNPR’s expertise will help HPE stay competitive against rivals like Cisco Systems, Inc. (CSCO Quick QuoteCSCO - Free Report) and Arista Networks, Inc. (ANET Quick QuoteANET - Free Report) .

Notably, Cisco Systems dominates the enterprise networking market with a market share of more than 40% while Arista Network and Hewlett Packard Enterprise have a nominal market share. The acquisition of Juniper Networks will make HPE the second-largest enterprise networking solution provider after Cisco Systems.

HPE’s Long-Term Prospects Remain Strong

Despite the near-term volatility, Hewlett Packard Enterprise’s growth prospects remain optimistic. It has been steadily shifting focus from traditional hardware sales to cloud, AI and data services- a transition that is already yielding positive results.

Hewlett Packard Enterprise’s GreenLake platform, which allows enterprises to manage hybrid cloud environments, has seen significant adoption. The platform’s recurring revenue model provides a stable and predictable cash flow, which will be further bolstered by the integration of Juniper Networks’ products.

Additionally, Hewlett Packard Enterprise is well-positioned to capitalize on the growing demand for AI and machine learning solutions, particularly as more businesses invest in data-driven decision-making. The Juniper Network deal aligns well with HPE’s broader strategy of becoming a leader in the AI-driven cloud infrastructure space.

Conclusion: Hold HPE Stock for Now

While the recent stock offering has raised concerns about earnings dilution and short-term stock pressure, HPE’s attractive valuation and long-term growth prospects make it worth holding. The stock’s current forward 12-month price-to-earnings and price-to-sales multiples are 7.87X and 0.67X, respectively, much lower than the Zacks Computer – Integrated Systems industry averages of 18.46X and 1.92X.

The acquisition of Juniper Networks will enhance HPE’s competitive position in the cloud and networking markets, setting this Zacks Rank #3 (Hold) company up for future growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.