Dell Earnings: PC and Server Weakness Continues but Within Our Expectations; Maintain $46 Fair Value

We maintain our $46 fair value estimate for Dell Technologies DELL after the company reported weak fiscal 2024 first-quarter results that were modestly ahead of our expectations. Second-quarter guidance was also weak but in line with our model. Dell’s core markets of personal computers, servers, and storage are all deep in a cyclical downturn that doesn’t appear to have troughed yet. While we expect a recovery toward the end of fiscal 2024, this cyclical weakness exemplifies Dell’s lack of durable economic profitability and our no-moat thesis, in our view. We see the shares as fairly valued.

First-quarter sales dropped 20% year over year and 16% sequentially to $20.9 billion. Both of Dell’s segments dropped steeply behind soft demand from consumers and enterprises digesting built-up inventories of servers and storage systems.

Profitability was a brighter spot for Dell. Non-GAAP gross margin rose 200 basis points year over year and 90 basis points sequentially to 24.7%, behind deflationary input costs. We see these deflated costs as a short-term benefit for Dell and expect its own pricing to fall in the coming quarters, bringing margins back down to earth. Gross margin strength didn’t drop down to operating profit; non-GAAP operating margin fell 60 basis points year over year and 110 basis points sequentially to 7.6% due to fixed costs in operating expenses that hurt the firm when volume crashes.

Guidance for the second quarter met our expectations on the top and bottom lines and implies another sequential volume decline and margin compression. We’re anticipating revenue to bottom out in the second quarter, but Dell’s vulnerability to market pricing dynamics could keep results sour for longer. Dell maintained its full-year outlook, which is a positive to us as it implies sequential sales growth off the implied level in the second quarter.