New Dell Price Target After Earnings Crush Wall Street
The technology firm posted video game revenue numbers as it blew analysts away.
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On Tuesday evening, Dell Technologies (DELL) went to the tape with the firm’s fiscal second quarter financial results. For the period ended July 31, Dell posted an adjusted EPS of $7.04 (GAAP EPS: $6.34) on revenue of $46.971 billion. These numbers absolutely crushed expectations, as Wall Street’s view coming into this release was not even “ballpark” close. Both the adjusted and GAAP EPS prints beat Wall Street by a rough $2 per share.
If that’s not impressive enough, the revenue number, good for year-over-year growth of 57.6%, beat expectations by about $2.5 billion. To put it in video game terms, for the firm’s second quarter, Dell’s performance was akin to Bo Jackson’s performance in the 1989 classic Tecmo Bowl. That performance could be described as unstoppable.
On the quarter, COO Jeff Clarke commented in the press release:
“IT environments have shifted from cost centers to value drivers that fuel growth and competitive advantage, and customers are investing accordingly — creating opportunity across our portfolio. That’s clearest in our AI server business where we booked a record $60.9 billion in orders, recognized a record $16.4 billion in revenue and exited the quarter with a record $95 billion backlog. We’re seeing broader revenue growth as well, with traditional servers and networking up 122%, storage up 26% and our client solutions up 20% year over year.”
CFO David Kennedy added:
“In our second quarter, we delivered record revenue of $47 billion, record EPS and a record $4.3 billion returned to shareholders. Our advantages reinforce one another, and throughout the quarter we used these strengths to drive growth, share gains, profitability and cash generation. With AI momentum accelerating and our opportunity expanding across the portfolio, we’re raising our full-year FY27 revenue outlook by $25 billion to $192 billion, up nearly 70% year over year.”
Wow.
Operations
While sales increased 57.6% to $46.971 billion, gross profit increased 80% to $9.83 billion as gross margin improved from 18.3% to 20.9%. Total operating expenses increased 21%, leaving a GAAP operating income that grew 204% to $5.385 billion. After adjustments primarily for stock-based compensation and the amortization of intangibles, operating income became $5.929 billion (+160%).
After accounting for interest, other income and expenses and taxes, GAAP net income grew 255% to $4.133 billion. This works out to a fully diluted GAAP EPS of $6.34, up from the year-ago comp of $1.70. Once adjusted, net income increased 189% and the fully diluted EPS landed at $7.04, up from $2.32.
Segment Performance
Infrastructure Solutions Group generated sales of $31.782 billion (+89%), producing a segment operating income of $4.781 billion (+225%). Within this group, sales related to AI-optimized servers were up 100%, sales related to traditional servers were up 122% and storage related sales were up 26%.
Client Solutions Group generated sales of $15.034 billion (+20%), producing a segment operating income of $1.142 billion (+42%). Within this group, commercial sales were up 22%, while sales to consumers were up 7%.
Guidance
For the current quarter, Dell is projecting total revenue of $49 billion, which would be good for annual growth of 81% and is literally a country mile above the $41.4 billion that Wall Street was looking for. The firm also sees an adjusted EPS of $6.50. Wall Street? Was looking for something close to $4.50. This guidance simply blew the community of sell-side analysts away.
For the full fiscal year, Dell now sees total revenue of $192 billion, which would be good for annual growth of 69% and is up from previously issued guidance for $167 billion. Wall Street was looking for $173 billion. Adjusted full year EPS is projected at $25.50. Previous guidance was for $17.90. Wall Street was looking for $18.85. This guidance is amazing.
Fundamentals
For the period reported, Dell generated operating cash flow of $2.225 billion. Out of that print came capex spending of $1.239 billion, leaving free cash flow of $986 million (-47% year over year). After adjustments, primarily for more than $6.5 billion in receivables, free cash flow for the quarter surged to $8.149 billion. During the period, Dell repurchased $3.796 billion in common stock for the corporate treasury and paid out $405 million in cash dividends to shareholders.
Turning to the balance sheet, Dell ended the quarter with a cash position of $11.569 billion and inventories of $21.29 billion. Added to receivables, that brings current assets to $80.547 billion. Current liabilities are running at $83.703 billion. That includes short-term debt of $8.481 billion but also deferred revenue (not a true financial obligation) of $14.761 billion. That leaves Dell with current and quick ratios (once adjusted for deferred revenues) of 1.17 and 0.86, respectively. That’s not awesome, but it does get a passing grade.
Total assets amount to $127.393 billion, of which only 18.7% is labeled as either goodwill or other intangibles. Total liabilities less equity comes to $128.82 billion. That includes long-term debt of $25.985 billion but also includes an additional $14.957 billion in deferred revenue not considered to be current. This balance sheet gets a solid B-/C+.
Opinion
Dell posted a blowout quarter. Dell issued incredible guidance. Cash flows are still healthy despite increased capex spending. The only thing I don’t absolutely love here is the balance sheet, and that balance sheet is not awful. Dell would be a good company in which to own equity dependent upon price.
Last week, in Doug Kass’ Diary, I posted a chart of Dell that showed the stock trying to break out from this obvious bull-flag pattern. The stock had been trying to hold onto support at its 50-day SMA and until Tuesday, still was. The upside pivot for the flagpole that led to the bull flag stands at $469. As of Wednesday morning, that level matters very much. Both relative strength and the daily MACD took much more bullish looking turns this morning in response to the overnight rally.
Do I think I can own DELL here? Yes. I got distracted last week and failed to follow my own “cautious” advice. It’s not too late, in my opinion. My target price for DELL based on this setup and the strong fundamentals will be $580.
positions: none
