AI Servers And Modernized Operations Will Create Competitive Edge

Key Takeaways

• Dell's AI-optimized server growth and market positioning are expected to drive substantial revenue growth in the AI hardware and services sector.
  
• Modernization initiatives and Dell Financial Services expansion are projected to improve efficiencies, profit margins, and customer engagement.
  
• Competitive pricing pressures, fluctuating consumer demand, and supply chain issues may negatively impact Dell's profitability and revenue growth across various segments.

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 experiencing significant growth in its AI-optimized server business, with an expected increase to $15 billion in AI server shipments. This expansion, driven by custom engineering and design capabilities, is likely to substantially impact revenue growth.
  
• The growing AI hardware and services total addressable market, projected to reach $295 billion by 2027 with a compound annual growth rate of 33%, is expected to support Dell's revenue growth as the company is strategically positioned to capture a large share of this market.
  
• Strength in small and medium business demand and preparations for a broader PC refresh cycle, attributed to the aging installed base and the Windows 10 end of life, are projected to fuel revenue growth and improve net margins with higher-value product sales.
  
• The company is executing modernization initiatives to simplify, standardize, and automate operations, which are expected to unlock efficiencies and decrease operating expenses, leading to improved earnings and profit margins.
  
• Expansion of the Dell Financial Services division with payment solutions and an increased focus on attaching high-margin services and peripheral products to core offerings are expected to contribute to higher earnings through improved sales efficiency and customer engagement.

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 May 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 19.4x on those 2028 earnings, up from 14.3x today. This future PE is greater than the current PE for the US Tech industry at 12.6x.
• 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 8.87%, as per the Simply Wall St company report.

Dell Technologies Future Earnings Per Share Growth

Risks

• Dell Technologies is facing a more competitive pricing environment, which could lead to a decline in gross margin rates and affect overall profitability.
  
• The company's revenue and profitability outlook are influenced by fluctuating demand in their Consumer Solutions Group, indicating potential volatility in earnings.
  
• The expected expansion in AI server shipments might be constrained by supply chain challenges or increased competition, impacting revenue growth potential.
  
• The macroeconomic environment, especially in relation to U.S. government spending, could be adverse, potentially affecting Dell's revenue negatively.
  
• There are headwinds expected in their storage business due to shifts towards Dell IP storage, and any shortfall in executing this pivot could negatively affect operating margins.

Valuation

• The assumed bullish price target for Dell Technologies is $169.32, which represents two standard deviations above the consensus price target of $125.98. 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 19.4x, assuming you use a discount rate of 8.9%.
• Given the current share price of $93.95, the bullish analyst price target of $169.32 is 44.5% 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.