Cloud Migration Will Erode Hardware Margins Amid Global Rivalry

Key Takeaways

• Cloud migration and greater SaaS adoption are eroding demand for Dell's traditional hardware, undermining future growth and exposing weaknesses in its business model.
  
• Ongoing reliance on low-margin products and slow adoption of higher-value recurring revenue streams limit stability in the face of stiffening competition and supply chain risks.
  
• Strategic focus on AI infrastructure, proprietary solutions, and recurring revenue is driving profitability, market share gains, and margin expansion amid strong commercial demand and supply chain efficiency.

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.

• Cloud migration and SaaS adoption are continuously eroding demand for Dell's core on-premise infrastructure and personal computers, threatening long-term revenue growth despite the current AI-fueled surge in server sales and a seemingly robust pipeline.
  
• Intensifying global competition, geopolitical instability, and the risk of ongoing supply chain disruptions are likely to raise input costs and add operational complexity, compressing net margins for Dell's hardware-centric business far beyond temporary one-time expenses.
  
• The company's persistent reliance on low-margin PC and commodity server sales leaves it exposed to industry-wide commoditization, which exerts downward pressure on average selling prices and gross margins, undermining the sustainability of recent earnings strength as early AI deployments normalize.
  
• Dell's shift towards higher-value as-a-service and recurring revenue streams is progressing slowly, leaving the company's top-line and earnings exposed to secular declines in traditional infrastructure spending and limiting the stability that comes from software-centric business models embraced by competitors.
  
• The rising dominance of hyperscale cloud providers such as AWS, Microsoft Azure, and Google Cloud, which continue to internalize hardware needs and develop custom AI solutions, is shrinking Dell's future addressable market and threatens to cause long-term stagnation in both revenue and operating income.

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 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach $7.6 billion (and earnings per share of $11.27) by about September 2028, up from $4.8 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 11.3x on those 2028 earnings, down from 17.3x today. This future PE is lower than the current PE for the US Tech industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 4.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.98%, as per the Simply Wall St company report.

Dell Technologies Future Earnings Per Share Growth

Risks

• Continued rapid growth in demand for AI infrastructure is driving record revenues and expanding pipelines for Dell, particularly through large-scale deployments and enterprise adoption, which directly supports robust revenue and earnings growth in the coming years.
  
• Dell's strategic shift towards higher-margin proprietary storage solutions and recurring revenue streams, such as as-a-service models and integrated AI life cycle solutions, is increasing profitability and providing greater revenue visibility, thereby supporting sustained margin expansion.
  
• The accelerating PC refresh cycle, driven by the Windows 10 end-of-life event and the large portion of the installed base still in need of upgrades, positions Dell to benefit from continued commercial and SMB demand, maintaining or improving both revenue and net profit margins.
  
• Dell's effective supply chain management and ongoing modernization initiatives are reducing operational costs while supporting the company's ability to absorb shocks from tariffs and input cost volatility, which can help stabilize and potentially improve net margins and free cash flow.
  
• Strengthening customer traction across new enterprise and sovereign segments, alongside differentiated AI and storage offerings, is creating opportunities for market share gains, enhancing top-line revenue growth and improving the potential for higher earnings through cross-selling of services and solutions.

Valuation

• The assumed bearish price target for Dell Technologies is $112.19, which represents two standard deviations below the consensus price target of $147.62. 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 $118.5 billion, earnings will come to $7.6 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $124.45, the bearish analyst price target of $112.19 is 10.9% 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.