AI And IP Storage Transition Will Unlock New Opportunities

Key Takeaways

• Strategic shift to AI and IP storage aims to drive growth in revenue and operating income through AI-optimized portfolios.
  
• Investments in AI servers and infrastructure solutions position Dell to capture emerging tech demand, boosting revenue and earnings.
  
• Competitive pricing and soft consumer demand in the PC market may pressure margins, while supply chain issues and AI server competition heighten cost concerns.

Catalysts

Designs, develops, manufactures, markets, sells, and supports various comprehensive and integrated solutions, products, and services in the Americas, Europe, the Middle East, Asia, and internationally.

• Dell is strategically transitioning towards AI and IP storage, focusing on AI-optimized portfolios and high-margin Dell IP storage solutions, which are expected to drive significant growth in revenue and operating income.
  
• The company's investment in new technologies such as AI servers and infrastructure solutions positions it to capture future demand in emerging tech fields, potentially boosting both revenue and earnings as enterprise AI adoption accelerates.
  
• Dell’s modernization efforts and reduction in operating expenditures have enhanced its ability to innovate, likely to improve net margins as efficiency gains are realized.
  
• The anticipated PC refresh cycle, driven by factors such as Windows 10 end-of-life and new AI PC offerings, is expected to revitalize Dell's commercial PC segment, supporting revenue growth in the latter half of the fiscal year.
  
• Dell Technologies’ capital return strategy, including increased share buybacks and dividend growth, is expected to enhance shareholder value, contributing to earnings per share growth moving forward.

Dell Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Dell Technologies compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Dell Technologies's revenue will grow by 7.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.8% today to 6.3% in 3 years time.
• The bullish analysts expect earnings to reach $7.5 billion (and earnings per share of $9.47) by about April 2028, up from $4.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the US Tech industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Dell Technologies Future Earnings Per Share Growth

Risks

• The competitive pricing environment, particularly in the CSG segment, is leading to a decline in gross margin rates, potentially impacting net margins.
  
• Consumer demand remains soft, especially in the PC market, which may lead to continued discounting and affect revenue growth and profitability.
  
• Advances in AI-optimized servers are driving a shift in product mix that is margin rate dilutive, which might impact net margins despite being margin dollar accretive.
  
• Concerns regarding supply chain issues, including the impact of tariffs and geopolitical dynamics, could lead to increased input costs and affect revenue and earnings.
  
• The risk of intensified competition from ODMs in the AI server market could put additional pressure on margins and affect overall profitability.

Valuation

• The assumed bullish price target for Dell Technologies is $152.3, which represents one standard deviation above the consensus price target of $130.63. This valuation is based on what can be assumed as the expectations of Dell Technologies's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $170.0, and the most bearish reporting a price target of just $89.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $118.4 billion, earnings will come to $7.5 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $72.59, the bullish analyst price target of $152.3 is 52.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.