Windows 10's End Of Life And AI Expansion Will Drive Future Opportunities

Key Takeaways

• Strategic focus on AI and storage technology is driving revenue growth and improving profitability through increased demand and favorable product mix effects.
  
• Operational optimizations and capital return initiatives are enhancing earnings and shareholder value through cost reduction and efficient cash flow allocation.
  
• Competitive pricing, soft CSG demand, and tariff impacts strain margins and revenue, while AI pipeline reliance risks delay-driven growth stagnation.

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 Technologies is positioned to capture growth in the AI sector, with an expected increase in AI server shipments to at least $15 billion, which is anticipated to drive revenue and operating profit despite competitive pressures.
  
• The company has made significant advancements in its Dell IP storage portfolio, which is seeing strong demand and improving profitability, positively impacting net margins through a more favorable product mix.
  
• Dell's modernization efforts, including efficiency improvements and cost reductions, are expected to decrease operating expenses while allowing for increased investment in innovation, leading to higher earnings.
  
• The upcoming PC refresh cycle driven by Windows 10's end of life, new AI-enabled devices, and strong SMB indicators is anticipated to boost revenue in Dell's Client Solutions Group (CSG) throughout FY '26.
  
• Dell's capital return strategies, including an 18% dividend increase and a $10 billion boost in share repurchase authorization, are expected to enhance earnings per share (EPS) by effectively utilizing free cash flow.

Dell Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dell Technologies's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $6.8 billion (and earnings per share of $9.46) by about March 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 analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, up from 15.0x today. This future PE is greater than the current PE for the US Tech industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 1.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Dell Technologies Future Earnings Per Share Growth

Risks

• The competitive pricing environment, particularly in CSG (Client Solutions Group), is putting pressure on gross margins, which could impact net margins and earnings.
  
• The decline in consumer demand within the CSG segment persists, and sustained soft demand could lead to reduced revenues and profitability.
  
• There are concerns over the ability to maintain ISG (Infrastructure Solutions Group) margins flat in the face of high growth from potentially lower-margin AI server sales, affecting overall operating income.
  
• Tariff changes, particularly related to China, could introduce unforeseen costs, requiring strategic pricing adjustments that may not fully mitigate the impact on net income.
  
• The ongoing reliance on AI pipeline growth and backlog could be jeopardized if enterprises and sovereign customers delay acquisitions, which could stymie expected revenue growth and EPS performance.

Valuation

• The analysts have a consensus price target of $136.28 for Dell Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. 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 $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $115.9 billion, earnings will come to $6.8 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 8.4%.
• Given the current share price of $98.86, the analyst price target of $136.28 is 27.5% 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.