The strong April quarter earnings report from Dell Technologies is giving a badly needed boost to technology shares generally, and to enterprise hardware stocks in particular.
But there are some particular elements of the Dell story to keep in mind that don't necessarily translate to other players -- and Dell investors should be aware that the road gets tougher from here.
Dell beat Street expectations for the quarter on every measure. Revenue was $26.1 billion, up 16% from a year ago, and well ahead of both the company's guidance range of $24.5 billion to $25.7 billion, and the Street consensus at $25 billion. Likewise, non-GAAP profits of $1.84 a share blew past both Dell's own forecast of $1.25 to $1.50 a share, and Street consensus at $1.39.
Things looked even better under the surface. Infrastructure Solutions Group, which sells storage, servers, and networking gear to enterprise customers, had 16% revenue growth, a big beat over the Street consensus forecast for 5% growth. That was driven by 9% growth in storage, and 22% growth in servers and networking, both above expectations.
Client Solutions Group, Dell's PC business, grew 17%, with 22% in commercial PCs partially offset by just 3% growth in consumer PCs, a relatively small part of Dell's portfolio.
The strong results in enterprise hardware were a nice contrast with disappointing recent earnings points from both networking giant Cisco $(CSCO)$ and the enterprise storage company Nutanix $(NTNX)$.
And the strength in PCs came despite widely acknowledged slowing in the overall PC market, as Dell takes market share with its focus on PCs for the business market.
Dell saved one of the best parts of the story for yesterday afternoon's conference call with analysts, substantially increasing its outlook for the January 2023 fiscal year.
Dell now sees revenue growth for the year of 6%, with non-GAAP earnings growth of 12% -- that is well above its previous forecast of 3% to 4% revenue growth and 6% profit growth. And the company's July quarter guidance -- which calls for 10% revenue growth and profits of $1.55 to $1.70 a share -- beat Street estimates on both measures.
There were other positives. Dell bought back $1.5 billion of stock in the quarter, close to 5% of the company's market cap. Dell had instituted a $5 billion repurchase plan two quarters ago, following the recent spinout of its stake in VMware. As part of that transaction, VMware issued a special dividend to its largest holders, i.e., mostly to Dell itself, with most of the cash targeted at reducing Dell's debt load.
Dell also got a chunk of cash from the recent $4 billion sale of its former Boomi Technologies software unit to private-equity investors. CFO Tom Sweet said Dell will continue to buy back shares, but the pace will slow.
Dell spent almost no time on the earnings call talking about Russia and Ukraine. In an interview with Barron's, Sweet noted that the company has stopped doing business in both countries, where Dell had been generating about $1 billion a year in revenue combined.
Meanwhile, Sweet said China's recent Covid-related shutdowns of manufacturing sites in Shanghai was an issue, with backlog running at higher-than-normal levels for both the PC and enterprise hardware businesses.
Sweet said that the company's Latitude notebook PC line is manufactured in that area, and components used in those products and others are produced there as well. But Dell appears to have navigated the supply-chain issues more nimbly than some other enterprise hardware players.
As for macroeconomic issues, Sweet says that "there are a lot of conflicting signals."
He notes that input costs are rising, with logistics and transportation costs a particular issue, and component shortages remain a problem. He expects those elements to continue to be "a significant drag" to margins.
Dell has raised prices on many products to compensate, he says, while noting that "if you price too high, you slow down demand." Sweet sees some margin compression ahead, as well as headwinds from unfavorable currency exchange rates.
The Street was pleased with the numbers, particularly given recent stumbles by other hardware players.
"It is very clear Dell is gaining share and executing a challenging supply chain environment in a very impressive manner," Barclays analyst Jim Suva writes in a research note, while repeating his Buy rating and $65 target price. "The handoff from consumer IT spending to corporate IT spending helps Dell and we are at the early innings of this handoff."
Evercore ISI analyst Amit Daryanani, who had recommended buying Dell shares heading into the report, writes in a research note that while the guidance was better than the Street had feared, it still looks conservative, implying flat year-over-year sales growth in the second half of the year. He thinks that the company's elevated backlog and continued tailwinds in the form of strong infrastructure demand should provide further upside from here. He keeps his Outperform rating, and lifts his target price to $63, from $60.
The stock is hardly risk-free, with growth certain to slow measurably from here. But statistically, Dell remains one of the cheapest tech stocks, trading for 7 times expected current year profits and roughly 0.3 times projected sales -- and the company has a 3.3% dividend yield.
On Friday, the strong Dell results triggered healthy gains across the hardware sector. Hewlett Packard Enterprise $(HPE)$, HP Inc. $(HPQ)$, Pure Storage $(PSTG)$, and NetApp $(NTAP)$, all of which report earnings next week, have all rallied 3%-4% on Friday.
Apple $(AAPL)$, IBM $(IBM)$, Arista Networks $(ANET)$, Cisco (CSCO), Western Digital $(WDC.UK)$, and Seagate $(STX)$ are all trading higher as well.
Dell shares rallied 12.86% on Friday, the stock's biggest one-day move in more than two years, and the second-biggest in the company's history as a public company. That move has reduced Dell's year-to-date decline to 12%.
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