Cloud Migration And Price Pressures Will Erode Value

Key Takeaways

• Shifting IT trends and decentralization threaten Dell's core hardware business, while increased price competition squeezes margins despite modest AI server gains.
  
• High debt and global trade risks limit strategic flexibility and elevate costs, challenging long-term competitiveness and earnings growth.
  
• Rapid growth in AI infrastructure, ongoing innovation, and operational efficiencies are boosting margins, strengthening cash flow, and enabling shareholder returns through buybacks and dividends.

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.

• The migration of enterprise workloads to the public cloud and hyperscale data centers is reducing reliance on traditional on-premises infrastructure, directly threatening the long-term revenue base of Dell's core server and storage segments as customers favor more flexible, software-native solutions.
  
• The rapid emergence and proliferation of edge computing and Internet of Things are shifting IT needs away from large, centralized hardware-limiting Dell's ability to scale and potentially resulting in lower hardware volumes and revenue growth as computing power decentralizes.
  
• Severe price competition and commoditization in both the PC and traditional server markets continue to exert downward pressure on gross and net margins, particularly as Dell's incremental AI server revenues show only modest improvement in profitability and may dilute overall margin rates.
  
• The business is burdened by high leverage following recent debt issuance, which restricts strategic flexibility and could hinder long-term investments in R&D or acquisitions needed to compete effectively in a market increasingly driven by software and services, ultimately constraining earnings growth.
  
• Ongoing geopolitical risks and rising trade barriers are expected to generate supply chain instability, increase costs, and erode global competitiveness, which may result in higher input costs and negatively impact future net income despite current solid cash flow.

Dell Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Dell Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Dell Technologies's revenue will grow by 5.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.7% today to 6.1% in 3 years time.
• The bearish analysts expect earnings to reach $7.0 billion (and earnings per share of $11.13) by about August 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 bearish analyst cohort, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, down from 19.1x today. This future PE is lower than the current PE for the US Tech industry at 20.4x.
• Analysts expect the number of shares outstanding to decline by 3.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

Dell Technologies Future Earnings Per Share Growth

Risks

• Strong, growing demand for AI-optimized servers and Dell's ability to rapidly capture large-scale, complex orders is accelerating both revenue and earnings growth, as evidenced by a record $12.1 billion in AI server orders and a backlog of $14.4 billion, indicating robust forward visibility and pipeline conversion.
  
• Dell's continued innovation in high-performance, energy-efficient infrastructure and the expansion of its product and service ecosystem, including storage and deployment services for AI and cloud, helps maintain premium pricing and supports gross margin expansion.
  
• Operating leverage from supply chain optimization, ongoing cost efficiencies, and modernization efforts are consistently reducing operating expenses, which is lifting operating income and supporting higher net margins over time.
  
• The shift toward AI-enabled commercial PCs, next-generation servers, and higher-margin Dell IP storage products is increasing the value mix within key business segments, resulting in improving margin rates and the potential for long-term revenue and earnings uplift.
  
• Consistent and substantial share repurchases along with growing dividends reflect management's ongoing confidence in the business, and continual strong cash flow generation provides financial flexibility for future R&D investment and capital allocation, which supports long-term shareholder returns.

Valuation

• The assumed bearish price target for Dell Technologies is $107.99, which represents two standard deviations below the consensus price target of $142.33. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $180.0, and the most bearish reporting a price target of just $104.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $114.0 billion, earnings will come to $7.0 billion, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $128.48, the bearish analyst price target of $107.99 is 19.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.