Earnings

Will Dell’s share price continue to climb on Q2 earnings?

Dell’s [DELL] share price is up 16% since the start of the year after closing at $60.64 on 25 August. More notably, Dell’s share price has risen 137.7% since its 52-week low of $25.51, which it dipped to in intra-day trading on 18 March. 

Against its competitors, Hewlett Packard [HPQ] and Lenovo [0992], Dell’s share price has been outperforming. Hewlett Packard is currently down 11.3% for the year (through 25 August). Lenovo, meanwhile, is down 6.9% for the year and up 37.4% since its mid-March drop. 

Although Dell’s share price has lagged behind the NYSE Computer Technology Index so far in 2020 (the index is up 32.7% for the year to 25 August), it has outpaced the it since the index’s 23 March low. While the latter has climbed 71.6%, the former is up 78.7%.

Will Dell’s share price to climb further after it announces its Q2 earnings report on 27 August?


Silver linings

In the first quarter of the fiscal year, the Texas-based computer giant posted revenue of $21.9bn, dipping marginally year on year from the Q1 2020 revenue of $21.91bn. Nevertheless, this surpassed expectations — Zacks Equity Research, for instance, had been expecting $21.79bn. Earnings per share, meanwhile, were $1.34 versus $1.11 expected — an EPS surprise of 20.7%. 

But, the shift to working from home meant many customers were either cutting IT infrastructure costs or reducing IT spending altogether. 

As a result, Dell’s infrastructure solutions group revenue fell around 8% year-over-year to $7.6bn. Servers and networks sales dropped 10% to $3.8bn, while storage sales were down 5% to £3.8bn. 

The upside was that the pandemic had generated a demand for laptops and mobile workstation computers. Dell’s client solutions segment was up 2% at $11.1bn. Commercial revenue was up 4% at $8.6bn, while its consumer revenue was down 5% at $2.5bn. This was largely because the firm started shipping orders directly rather than through retailers. Consumer direct orders were up 40% in the three months to 30 April and consumer retail orders were down 37%. 

+40%

Q1 increase in consumer direct orders

As for Q2 2021, Dell has withdrawn guidance but is expecting results to be slightly weaker than usual — the company said in the recent earnings call that it usually sees 6%–8% sequentially from the first quarter. Again, sales of laptops, desktop computers and notebooks are likely to be robust and a major contributor to total revenue. 

Analysts are expecting revenue to be $22.49bn, which would be a 4% year-over-year decrease, according to Yahoo Finance. Earnings per share are predicted to be $1.38, compared to $2.15 posted for the year-ago period.


Analysts’ outlook

Beyond the second quarter, Dell’s share price could be set to rise further. The share price spiked on 16 July following the announcement that it was looking at spinning out software company, VMWare.

Although any spin-out wouldn’t take place before September 2021, the news was enough for Bank of America (BofA) analysts to raise their share price target for the stock from $60 to $70.

“We think such a transaction, if it were to go through, could help unlock the value of core-Dell, which continues to trade at low multiples, while as a separate company, VMWare would be able to pursue its own strategy for growth,” Wamsi Mohan, a senior equity research analyst at Bank of America, wrote in a note. 

“We think such a transaction, if it were to go through, could help unlock the value of core-Dell” - Wamsi Mohan, senior equity research analyst at Bank of America

Any spin-out would also benefit Dell’s valuation, which is currently lower than VMWare’s, said Deutsche Bank analyst Jeriel Ong.

“Overall, our analysis suggests ~20% to 30% upside to Dell from a multiple expansion perspective should the company trade stand-alone,” he wrote in a note to clients at the start of July, as reported by Barron’s. Ong kept the price target at $60. This has since been raised to $65. 

Of the 19 analysts polled by MarketBeat, eleven are a hold and eight a buy.

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