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The Zacks Analyst Blog Highlights: Dell, Lenovo, Cisco and Hewlett Packard

Zacks Equity Research

For Immediate Release

Chicago, IL –June 11, 2019 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Dell Technologies DELL, Lenovo LNVGY, Cisco CSCO and Hewlett Packard Enterprise HPE.

Here are highlights from Monday’s Analyst Blog:

Server Market Decelerates in Q1: DELL, HPE & More

The server market, which was showing signs of recovery beginning 2017, seems to have again landed in troubled waters. After experiencing six consecutive quarters of double-digit revenue growth, the market seems to have slackened in 2019 with a single-digit revenue rise witnessed in the first quarter.

Per International Data Corporation (IDC) data, worldwide server revenues inched up 4.4% year over year to $19.8 billion in first-quarter 2019 while overall shipment dipped 5% to below 2.6 million units.

Going by IDC, revenues of volume servers increased 4.2% year over year to $16.7 billion while the mid-range server registered a 30.2% surge to $2.1 billion. However, high-end system revenues for a second consecutive quarter showed a steep decline of 24.7% to $976 million.

Also, IDC noted a 6% year-over-year climb in x86 server revenues, reaching a value of $18.5 billion, while revenues from non-x86 servers dropped 13.7% year over year to $1.3 billion.

The research firm observed that a decline in demand from both enterprise buyers and hyperscale companies coupled with a tough year-over-over comparison was an overhang on the growth rate during the reported quarter.

Although lower unit shipments was a blow, the firm added that higher average selling prices (ASP), courtesy of enterprise’s demand for richly configured servers, boosted the revenue growth rate for many vendors.

How Are the Vendors Poised?

Dell Technologies secured the top spot in both revenue market and volume share space. Over the last few quarters, Dell has continuously registered year-over-year growth in server revenues and managed to drastically taper the market-share difference with Hewlett Packard Enterprise.

The reason for this stellar market-share growth is that the company has been able to strategically capitalize on expanded opportunities from the EMC acquisition. On the last earnings call, management mentioned weakness in the China market to be a relentless headwind. However, the company’s focus on acquiring new customers is likely to boost its top- and bottom-line growth going forward. Shares of the company have gained 11.1% in the year-to-date period.

HPE earned the second spot with 17.8% market share. The company is gaining traction from its focus on high-margin businesses, such as server, storage and IoT among others. In the first quarter, per IDC, HPE witnessed a fall of 10.9% in shipment volume. Notably, decrease in the Tier one server sales poses a challenge to the company. HPE shares have returned 6.7% year to date.

The third position is a draw among Inspur/Inspur Power Systems, Lenovo and Cisco, generating 6.2%, 5.7% and 5.3% share of total server revenues, respectively. IDC calls it a statistical tie when the gap among vendors is 1% or less.

Talking of Lenovo, the company expects to strengthen its position in high-performance computing and AI and continue to invest in servers, storage and networking. It hopes to see a growing momentum in hyperscale business, courtesy of its unique in-house design and manufacturing business model. In the year-to-date period, Lenovo shares have gained 8.2%.

Moving on to Cisco, the company has pioneered a network system, which is referred to as the Unified Computing System (UCS). This is a revolutionary blade server system, based on x86 architecture that is transforming data centers. In the last reported quarter, the company noted that its Data Center product category rode on the back of solid growth in both HyperFlex and servers. The Cisco stock has rallied 29.1% so far this year.

Is There a Silver Lining?

IDC believes that soft unit shipment volumes can be offset as long as surging demand for richly configured servers supports an uptick in ASP.

Moreover, we believe, a ramp-down in hyperscale spend will be temporary as demand for cloud services is consistently robust. The global server market will steadily grow in the quarters ahead, mainly owing to hyperscale server deployments by cloud-service providers.

There is a huge growth opportunity in the hyperscale server-infrastructure space with more and more companies shifting to cloud-based services. Moreover, proliferation of technologies, such as big data, artificial intelligence and machine learning are driving demand for hyperscale servers.

Also, Gartner’s latest forecast for IT spending (reflecting 3.2% improvement in 2019) depicts a favorable tech expense environment, which we believe, will positively influence the overall server market in the near term.

Zacks Rank

While Lenovo, HPE and Cisco carry a Zacks Rank #2 (Buy), Dell has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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