Dell Technologies NYSE: DELL Q3 results weren’t stellar but give the market reason to cheer. The results are mixed with revenue weakness offset by a significant margin improvement, a positive outlook and robust capital returns. The takeaway is that the 5% drop in share prices is a buying opportunity in a dividend-paying blue chip tech stock with a 10% to 20% upside.
Some analysts are buying the dip. Marketbeat is tracking five revisions in the first few days following the report; all are positive. The critical point from the chatter is that an inflection point is at hand. Weakness in PCs was offset by server and data center business strength, supported by demand for AI, and the PC outlook is unchanged. While there is some unexpected weakness in PCs, the shift into AI-enabled hardware and services will support business and generate a tailwind over the next few quarters.
All five of the revisions include an increased price target. The weakest of the lot is a 30% increase to $75, which is just shy of the broad consensus. The other four are above the broad consensus and average $82.50 or another 7.5% above the consensus and a new all-time high for this market.
Dell has a mixed quarter; results shine where it counts
Dell had a mixed quarter with $22.3 billion in revenue, falling nearly 10% compared to last year and missing consensus by 260 basis points. Weakness was seen in both Infrastructure and Client services, with weaker-than-expected PC sales offset to some degree by server and networking sales and sequential growth in the backlog. Other areas of strength are the RPO and deferred revenue, which are up 4% and 7% YOY on increases in hardware and software maintenance agreements, respectively.
The margin news is an area of strength in the report, with disciplined spending and working capital management driving results. The company’s adjusted earnings of $1.88 are down 18% compared to last year, outpacing the top-line decline by a wide margin but thousands of basis points better than expected. Analysts were looking for close to $1.45 or about 28% less.
Guidance was also mixed but plays into the idea of strength in 2024. The company pushed its timeline for the PC-rebound into 2024 and offered cautious guidance for Q4. The analysts are lowering their targets for Q4 to align with the expected 12% decline but still see 2024 as a solid year. The consensus figures for next year expect mid-single-digit top-line growth compounded by a wider margin.
Numerous new or enhanced partnerships and several AI-centric offerings intended to aid collaboration, hybrid-cloud operations, and inference will help drive results and may lead to outperformance.
Dell capital returns are safe
Dell’s capital return program looks safe enough for 2024. The company’s $2.2 billion cash flow, $9.9 billion YTD, is sufficient to sustain the 2.0% dividend payment and share repurchases. Capital returns amounted to $1 billion in Q3 and should continue at a similar pace in Q4. The balance sheet offers no red flags, with core leverage at 1.6X and long-term debt at about 2X cash.
The technical outlook is a little sketchy, with prices moving lower following the release, but there are signs of solid support at the current levels. Buyers met the initial response to create a large Hammer Doji showing support near $71. That support is being tested again and may result in another bounce soon. In this scenario, the share price may increase to test the top of the near-term range before moving to new highs. If not, this stock could wallow near current levels or lower until more news is available. In that scenario, Dell’s critical support is near $68.50.
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