In a world where laggard HP is battling a hostile takeover for fellow old tech brand Xerox, demand for consumer PCs remains tepid, and Corporate America is cutting capital expenditures amid uncertainty from the U.S.-China trade war, Dell’s latest earnings should cause some on Wall Street to raise their eyebrows.
The Round Rock, Texas-based Dell Technologies (DELL) blew away analyst profit projections for its fiscal third quarter announced Tuesday evening.
Here’s how Dell stacked up in the quarter compared to those Wall Street’s estimates:
Net sales: $22.9 billion vs. $23.03 billion estimate
Gross profit margin: 34% vs. 32.8% estimate
Operating profit: $2.44 billion vs. $2.32 billion estimate
Adjusted earnings per share: $1.75 vs. $1.59 estimate
“Overall, we are very pleased given the dynamics in the mixed environment we see,” Dell CFO Tom Sweet tells Yahoo Finance.
Results were powered by Dell’s client solutions segment, where sales rose 5% to $11.4 billion on the back of strength for commercial desktops and workstations. Within Dell’s infrastructure segment, storage sales popped 7% to $4.1 billion. And over at VMWare (Dell has an 82% stake in the cloud services provider), sales gained 11% to $2.5 billion.
What’s more, operating profit margins improved versus a year ago in all three of Dell’s business segments. Sweet says margins were boosted by chip price deflation, a dynamic likely to stay in place in the near-term.
Dell raised its full fiscal year non-GAAP earnings guidance to $7.25 to $7.40 a share. Previously Dell had forecast earnings of $6.95 to $7.40 a share.
PC and server sales dip
It wasn’t a totally clean quarter, however, which may have sent Dell shares down 4% in after-hours trading.
The main knock on Dell’s quarter were 6% and 16% respective sales drops in consumer PC and servers. Not new trends for Dell in both segments (the drop in server sales accelerated sequentially, while consumer improved), but continuing ones that have probably weighed on the stock price given their overall importance to Dell’s bottom line.
Specific to PCs, the company says chip supply shortages at Intel have worsened from three months ago and will continue to impact performance. Sweet sees the chip supply shortage continuing into the first half of next year and then beginning to abate.
As for servers — a pricey purchase for companies of any size — are being held back by trade related uncertainty, Sweet believes.
“We are seeing it [uncertainty] play out in large enterprise, big bids if you will,” Sweet says. “There does seem to be this level of caution in the environment right now.”
Market being too harsh on Dell
Indeed, Dell did its part to entice the bulls back into the stock. And on paper, the stock does look cheap in light of its third quarter performance and raised profit outlook.
Dell’s stock trades on a meager forward price-to-earnings multiple of 7.7 times, according to Yahoo Finance premium data. That’s below struggling PC maker HP that trades at 8 times forward earnings and Hewlett Packard Enterprises, which clocks in at 8.8 times.
Both of those aging tech companies would give their left arms for Dell’s latest quarter.
“Overall, we continue to see Dell as one of the most attractive names in IT Hardware given its conglomerate discount valuation, coupled with its one-stop-shop selling motion that should enable them to gain market share in a slowing TAM. We see hardware consolidation as continuing and see Dell as one of the relative and absolute winners in this framework,” says Deutsche Bank analyst Jeriel Ong about Dell.
If only Intel did its part for once on the chip front.