Dell Stock Retreats On Weaker Sales, Falls Into Value Terrirtory

Dell Technologies NYSE: Dell reported earnings that were above analysts' expectations, but the stock fell anyway during market hours as PC sales weighed on investor sentiment. PC sales have been declining for the year and were down around 12 percent in the first quarter. The global economy has weighed on demand as consumers have slowed purchases owing to falling purchasing power and depleting levels of savings.  Shares were up 2.75% after trending lower during early trading.

For the quarter, Dell posted revenue of $26.4 billion up 9% from the previous year. Earnings per share came in at $1.68, on the higher end of consensus, which had ranged from $1.55 to $1.70 and slightly above the consensus estimate of $1.64. GAAP EPS came in at 68 cents. Dell’s valuation as a result of the second quarter earnings currently trades at a valuation, that investors might consider cheap.

Client Solutions Group, which is responsible for personal computers was up 9 percent, meanwhile, commercial revenue was up 15 percent, but consumer revenue declined by 9 percent. Dell’s Infrastructure Solutions Group was up 12 percent.

Despite weakness in PC sales, commercial sales and enterprise division continues to make up for the weakness.  Dell has benefitted from new commercial models and continues to get strong demand.  On the enterprise side of the business, demand for products such as PowerStore, and servers continued to also witness strong demand, with revenue for the segment coming in 16% higher.

Management stated the following

"We continued to execute well in an increasingly challenging environment with record second-quarter revenue of $26.4 billion, up 9%," said Jeff Clarke, vice chairman, and co-chief operating officer, Dell Technologies. "We also advanced our long-term strategy – growing the core while innovating for our customers and enabling their opportunities in the data era."

"We delivered strong CSG and ISG growth and profitability – with revenue up 12% and 9% respectively – although we observed more cautious customer behavior as the quarter progressed," said Chuck Whitten, co-chief operating officer, Dell Technologies. "Customers continue to prioritize advanced technology solutions to compete and succeed in the years ahead, and we are confident in our long-term opportunities."   

What’s driving revenue?

Enterprise and commercial sales have been relatively more resilient to the global slowdown, and many company companies continue to have a high level of cash on their books. Consumers overspent in the previous years which led to savings falling, on the other hand, corporations, who are flush with cash, are choosing to invest in infrastructure as they try to get ahead of the current inflationary environment. And considering that cash levels, the spending is likely to continue for a couple of quarters, at least until the economy starts to show greater levels of weakness. Cloud and databases have been in a slight bubble, which resulted in slight overinvestment, but companies seem to be content investing in them for now.

Cloud solutions will continue to witness strong growth, despite a very competitive industry, and are expected to continue to grow by around 15% until 2030. But, risks to the cloud remain, largely as overinvestment in cloud and data centers. A number of short-sellers have started to short the market, citing excessive exuberance, but it remains to be seen whether this thesis plays out.  Demand for the enterprise and cloud side of the business is not only witnessing demand from traditional markets such as North America, but has plenty of room to grow in countries like Japan, and China, all of which will increasingly adopt cloud-based solutions.

Dell’s overall finances also remain intact, but debt remains a slight concern, with total long-term debt currently standing at $21 billion, although the current level of debt is down from the previous high of around $45 billion. Dell’s cash has also been dwindling, although the cash flow during the quarter continued to be at an acceptable level, which should help the company mitigate rising interest rates. Dell is trading at low valuations, and the market has not yet taken any significant interest in the stock as of yet, but if results keep coming in like they have this quarter, that could change quickly.