Dell Is an IT Hardware Behemoth, but Vulnerable to Cyclical Markets and Not Moaty

Analyst

William Kerwin

Dell Technologies is an enterprise hardware behemoth. Dell holds top market shares across its businesses, but these are predominantly commoditized, cyclical, and price-competitive markets that, in our view, don’t endow a leader like Dell with an economic moat. We forecast Dell to see no more than modest top line growth into the medium- and long-term, and see little opportunity for material and durable margin expansion. Dell’s strong suit is its robust free cash flow generation, both in absolute terms and as a share of its net income. We are pleased with the company’s newfound focus on shareholder returns as a prioritized use of this heady cash flow.

Dell holds top-three market shares in all of its primary businesses: personal computers (PCs), peripheral displays, x86 servers, and external storage arrays. We view its comprehensive portfolio of on-premises data center hardware as a compelling value proposition, especially for enterprises pursuing hybrid cloud and hyperconverged infrastructure approaches. We expect its infrastructure business to maintain steady secular demand even as it faces pressure from the expansion of the public cloud. On the other hand, we think Dell’s largest business of PCs will experience a long-term secular decline, against which Dell can only hedge for so long with a focus on premium offerings. We view Dell’s core markets (PC and infrastructure) as largely commoditized, price competitive, and not moaty.

We expect Dell to focus on free cash flow generation, debt repayments, and shareholder returns over the medium-term. Keeping its investment-grade debt rating will be a top priority, and management will be keen to maintain its dividend and send extra cash toward repurchases. Dell may pursue small, adjacent acquisitions, but we are most focused on its ability to modestly grow its core businesses and maintain a steady margin profile.

Business Strategy & Outlook

We do not assign Dell Technologies an economic moat rating. Dell is a market share leader in its core businesses, but we view the markets in which it plays as mostly commoditized. Personal computers, peripheral displays, and IT infrastructure like mainstream servers are price-competitive markets that offer negligible switching costs and erode economic profits for participants. We don’t see meaningful operating leverage on larger volumes leading to a cost advantage for these vendors either, even for a $100 billion revenue gorilla like Dell. These vendors can benefit in strong pricing environments, like during the demand surge in 2021 and 2022, but ultimately are prone to market cyclicality that can lead to peaks and troughs in profitability.

Dell holds top-three market shares in its core markets, but this in and of itself does not belie economic profitability. In personal computers (PCs), Dell, Lenovo, and HP control nearly 60% of all sales, with market shares shifting around quarter-to-quarter. The market is consolidating around these top vendors, but it exhibits highly competitive pricing and slim profit margins for vendors. Dell is focusing on the highest-growth sections of the market—commercial, premium, and gaming notebooks—but we see the same competitive pricing with other vendors whittling away excess profits in the marketplace. We also see negligible switching costs and intangible assets in PCs. OEMs like Dell source critical components like processor and memory chips externally, and Windows is a common operating system between the top three vendors. We see similar dynamics in peripheral devices like display monitors.

In x86 servers, Dell holds the top market share among branded vendors, with HPE and Inspur rounding out the top three. x86 servers are based on Intel or AMD x86 processors and are built to an industry standard. While brands like Dell will attempt to differentiate and build brand loyalty with the quality of their hardware configurations and value-added services, ultimately we view these servers as commoditylike and lacking switching costs. 

Branded server vendors are competing primarily in middle section of the market, below hyperscale cloud-providers. Hyperscalers like Facebook and Amazon will use their massive scale and provide hardware designs to an original design manufacturer (ODM) that will use commodity components to tailor a server to their exact specifications. This is an option only available to hyperscalers, as they need to order sufficient volume for the ODM to earn a profit, but save significant cost compared to a branded vendor. Meanwhile, enterprises not only don’t have the volume to pursue this method, but appreciate the hardware commercial support a vendor like Dell can provide. From Dell’s perspective, they aren’t inclined to compete with hyperscale ODM partners and seek a lower operating margin at higher volumes.

Industry-standard hardware from the likes of Dell has become the norm for enterprise on-premises data centers used for private and hybrid clouds, with specialized mainframes from the likes of IBM now making up a minority of the overall market. Industry-standard server configurations allow customers to refresh data centers more easily, and build software-defined data centers and hyperconverged infrastructure (HCI). In a legacy data center, there would be dedicated server siloes for computing, storage, and networking—highly specialized hardware with dedicated operating teams. 

HCI describes a data center that uses industry-standard servers and pools all the computing, storage, and networking together via a hypervisor software, from the likes of VMware. This type of software-defined data center has numerous advantages for a customer. It allows customers to reap better performance and pay less for specialized hardware—relying on software instead of hardware to optimize a data center’s operation. It also allows a data center to scale more easily using software, rather than the only scaling being through additional hardware configurations. Finally, it leads to lower operating costs and less frequent hardware refreshes. As IT departments move to virtualized and hyperconverged infrastructure, hardware vendors are incentivized to build industry-standard servers, which inherently have low switching costs and minimal pricing power. Even in more legacy data center setups, x86 servers allow for quicker and simpler hardware refreshes. Steep competition, based on price and hardware support services, leads to slim profits for server leaders like Dell, HPE, and Inspur.

In storage, Dell is the undisputed market share leader, resulting from its transformative merger with EMC in fiscal 2017. Cloud storage is divided into primary, secondary, and backup/recovery storage layers. Primary storage is rapid, random-access memory used for real-time processing, typically built using DRAM chips. Secondary storage is based on hard disk drives (HDDs) and solid-state drives (SSDs) and pertains to large quantities of data stored for future access. Backup and recovery is redundant secondary storage used as a safeguard. Dell has a leadership position in all three, and follows the market in having the largest exposure to secondary arrays.

Similar to servers, Dell predominantly competes in the enterprise market, with ODMs building arrays to hyperscaler specifications at immense volumes. We see modestly higher differentiation in branded storage arrays for enterprise clouds than we do for industry-standard servers, but not enough to lead to a moat. Storage arrays compete on price and services, and have fast refresh cycles that erode economic profits for vendors like Dell. Especially as on-premises data centers move toward a hyperconverged model, storage gets less and less sticky, as it becomes easier for IT departments to replace arrays incrementally while software maintains operation.

All told, we don’t believe Dell’s broad-based market leadership enables it to hold an economic moat, based on steep price competition and relatively fungible products in its core enterprise market.

None

Economic Moat

Dell Technologies

Dell Technologies, Inc. is a holding company, which engages in the provision of information technology hardware, software, and service solutions through its subsidiaries. It operates through the following segments: Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), and VMware. The ISG segment includes servers, networking, and storage, as well as services and third-party software and peripherals that are closely tied to the sale of ISG hardware. The CSG segment consists of sales to commercial and consumer customers of desktops, thin client products, and notebooks. The VMware segment provides compute, cloud management, networking and security, storage and availability, and other end-user computing offerings. The company was founded by Michael Saul Dell in 1984 and is headquartered in Round Rock, TX.

Earnings data Q2 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Analysts tripped over themselves raising their price targets on the tech hardware retailer. This followed a rather encouraging quarterly earnings report.

Why Dell Technologies Stock Rocketed 4% Higher on Friday

Dell Technologies' (DELL) first-quarter fiscal 2024 results continue to reflect sluggish PC demand, hurting Client Solutions Group business.

DELL Q1 Earnings Beat Estimates, Lower PC Sales Hurt Revenues

Computer hardware giant Dell Technologies NYSE: DELL exceeded Wall Street's expectations for its fiscal first quarter, driving a brief rise in Dell stock. The Texas-based company reported adjusted earnings of $1.31 per share on sales of $20.92 billion for the first quarter.

Dell Tops Q1 Estimates but Fails to Deliver on Guidance

Dell Technologies Inc. (NYSE:DELL ) Q1 2024 Earnings Conference Call June 1, 2023 4:30 PM ET Company Participants Rob Williams - Head of Investor Relations Chuck Whitten - Co-Chief Operating Officer Tom Sweet - Chief Financial Officer Yvonne McGill - Corporate Controller Jeff Clarke - Vice Chairman and Co-Chief Operating Officer Tyler Johnson - Senior Vice President & Treasurer Conference Call Participants Erik Woodring - Morgan Stanley Wamsi Mohan - Bank of America Amit Daryanani - Evercore Toni Sacconaghi - Bernstein Shannon Cross - Credit Suisse David Vogt - UBS Samik Chatterjee - JPMorgan Michael Ng - Goldman Sachs Simon Leopold - Raymond James Tim Long - Barclays Sidney Ho - Deutsche Bank Operator Good afternoon, and welcome to the Fiscal Year 2024 First Quarter Financial Results Conference Call for Dell Technologies Inc. I'd like to inform all participants this call is being recorded at the request of Dell Technologies. This broadcast is the copyrighted property of Dell Technologies Inc. Any rebroadcast of this information in whole or part without the prior written permission of Dell Technologies is prohibited.

Dell Technologies Inc. (DELL) Q1 2024 Earnings Call Transcript

While the top- and bottom-line numbers for Dell Technologies (DELL) give a sense of how the business performed in the quarter ended April 2023, it could be worth looking at how some of its key metrics compare to Wall Street estimates and year-ago values.

Compared to Estimates, Dell Technologies (DELL) Q1 Earnings: A Look at Key Metrics

The PC retailer published its latest set of quarterly results. Although it posted notable declines in key line items, it beat estimates on both the top and bottom lines.

Why Dell Technologies Stock Topped the Market on Thursday

Dell Technologies reported better-than-expected earnings for its fiscal first quarter, driven by slightly higher-than-anticipated revenue and significant cost reductions in previously scarce components. Reporting just before the bell after its 1Q numbers were released in error, the computer company delivered revenue of $20.9 billion, a 20% decrease compared to the previous year but ahead of analyst expectations of around $20.3 billion.

Dell Technologies beats expectations with strong 1Q amid supply chain challenges

Dell Technologies on Thursday smashed Wall Street's estimates for fiscal first-quarter sales and earnings. Dell stock jumped on the news.

Dell Technologies Crushes First-Quarter Earnings, Sales Targets

Dell Technologies Inc.'s revenue plunged in the fiscal first quarter by the largest percentage on record for the company, but the results still easily beat diminished expectations and sent shares higher in Thursday trading.

Dell stock jumps after early earnings release shows largest sales decline on record, but still beats expectations

News summary First quarter revenue of $20.9 billion Operating income of $1.1 billion and non-GAAP operating income of $1.6 billion Diluted earnings per share at $0.79, and non-GAAP diluted earnings per share at $1.31 Cash flow from operations of $1.8 billion ROUND ROCK, Texas , June 1, 2023 /PRNewswire/ --  Full story Dell Technologies (NYSE: DELL) announces financial results for its fiscal 2024 first quarter. Revenue was $20.9 billion, down 20%.

Dell Technologies Delivers First Quarter Fiscal 2024 Financial Results

Advanced Micro Devices

Taiwan Semiconductor Manufacturing

These three companies are each highly exposed to both the server and PC markets. Peers HPE and HPQ, which serve the server and PC markets, each reported underwhelming numbers.

Why Advanced Micro Devices, Taiwan Semiconductor Manufacturing, and Dell Technologies Plunged Today

Broadcom

SentinelOne

Shortly after Wednesday's opening bell, the Dow Jones industrials were down 0.46%, the S&P 500 down 0.34% and the Nasdaq down 0.02%.

Earnings Previews: Broadcom, Dell, SentinelOne

Amazon

Alibaba

salesforce.com

DocuSign

Electronic Arts

eBay

Alphabet

Microsoft

Palantir Technologies

PayPal

Roku

SAP SE

Spotify

Twilio

Zoom Video

More than 200,000 global technology-sector employees have been laid off since the start of 2023, according to data compiled by the website Layoffs.fyi.

Global tech layoffs have surpassed 200,000 since the start of 2023

Cisco Systems

Corning

Juniper Networks

Seagate Technology Holdings PLC

Texas Instruments

While on the surface it appears that the stock market has had an incredible first five months, especially compared with 2022, in reality it has just been a handful of stocks that have lifted the Nasdaq up a stunning 25% and the S&P 500 up almost 10%.

Miss the Huge AI Rally? 7 Dividend Tech Stocks to Help Catch the Rest of the Run

Oracle

HP Inc. and HP Hewlett Packard Enterprise are suffering amid a downturn for personal computers.

HP Stock Drops Along With Dell, Oracle. The AI Bounce Is Missing Some Tech Firms.

Dell Technologies' (DELL) first-quarter fiscal 2024 performance is expected to have suffered from a sluggish PC market and unfavorable forex.

Dell Technologies (DELL) to Post Q1 Earnings: What's in Store?

C3.ai

NVIDIA

Looking ahead to next week's earnings lineup, a few artificial intelligence (AI) focused companies are set to release their quarterly reports.

Time to Buy These Artificial Intelligence-Focused Stocks Before Earnings?

Dell Technologies Inc is expected to report a year-over-year decline in earnings on lower revenues when the company announces its first-quarter 2024 financial results on June 1, 2023, after the markets close. According to the Zacks Consensus Estimate, the computer and technology services provider is anticipated to post quarterly earnings of $0.86 per share, representing a year-over-year decline of about 53%, while the company's revenue for the period is expected to fall nearly 23% to $20.2 billion.

Dell Technologies expected to show revenue and earnings decline in 1Q: preview

Dell Technologies (DELL) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Earnings Preview: Dell Technologies (DELL) Q1 Earnings Expected to Decline

ROUND ROCK, Texas , May 24, 2023 /PRNewswire/ -- Dell Technologies (NYSE: DELL) announces that Sam Burd, president of Client Solutions Group, will present in a fireside chat at the following conference: Bank of America 2023 Global Technology Conference – San Francisco, CA Tuesday, June 6, 2023 11:20 a.m. CT / 12:20 p.m.

Dell Technologies to Present at Investor Conference in June

LAS VEGAS , May 23, 2023 /PRNewswire/ -- DELL TECHNOLOGIES WORLD -- News summary Project Helix makes it easy for enterprises to build and deploy trustworthy generative AI Dell and NVIDIA infrastructure and software include built-in data security for on-premises generative AI applications Full story Dell Technologies (NYSE: DELL) and NVIDIA (NASDAQ: NVDA) announce a joint initiative to make it easier for businesses to build and use generative AI models on-premises to quickly and securely deliver better customer service, market intelligence, enterprise search and a range of other capabilities. Project Helix will deliver a series of full-stack solutions with technical expertise and pre-built tools based on Dell and NVIDIA infrastructure and software.

Dell Technologies and NVIDIA Introduce Project Helix for Secure, On-Premises Generative AI

Dell Technologies edge portfolio advancements make it easier to deploy and secure edge infrastructure, improve operations and boost network performance LAS VEGAS , May 23, 2023 /PRNewswire/ -- DELL TECHNOLOGIES WORLD -- News summary  Dell NativeEdge software platform simplifies, secures and automates edge infrastructure and application deployment Customers can achieve up to 130% return on investment in three years, significantly improve deployment times and reduce edge operations costs1 Dell Validated Design for Retail Edge provides intelligent warehouse automation to improve worker productivity and accelerate customer order fulfillment with inVia Robotics Dell Private Wireless Program expansion boosts secure enterprise connectivity across edge locations Enterprise SONiC Distribution by Dell Technologies simplifies how customers build and manage network fabric performance across the edge, data centers and public clouds Dell ProDeploy Flex service further accelerates deployment of edge solutions Full story  Dell Technologies (NYSE:DELL) introduces Dell NativeEdge, an edge operations software platform, designed to help businesses simplify and optimize secure edge deployments. Customers can streamline edge operations across thousands of devices and locations from the edge to core data centers and multiple clouds.

Dell NativeEdge Software Transforms Edge Operations

LAS VEGAS , May 23, 2023 /PRNewswire/ -- DELL TECHNOLOGIES WORLD --                                                      News summary Project Fort Zero will deliver an end-to-end, validated Zero Trust solution to help organizations minimize the risk of cyberattacks Dell expands its portfolio of security solutions and services to help organizations protect against threats, withstand and recover from attacks and outages Full story Dell Technologies introduces Project Fort Zero to provide an end-to-end Zero Trust security solution for global organizations to protect against cyberattacks. The solution will be validated by the U.S. Department of Defense and is part of a Dell Security portfolio expansion.

Dell Technologies Project Fort Zero to Transform Security

Dell and Nvidia extend partnership with Project Helix, bringing the power of generative AI to on-premises enterprise deployments.

Nvidia and Dell look to breathe new life into AI on premises with Project Helix

The industry's most comprehensive as-a-Service  and multicloud portfolio helps companies better manage their data and applications wherever they live LAS VEGAS , May 22, 2023 /PRNewswire/ -- DELL TECHNOLOGIES WORLD --  News summary Dell APEX expands with first Microsoft and Red Hat offerings, a series of collaboratively engineered Dell APEX Cloud Platforms to more seamlessly extend public cloud operating environments to on-premises IT deployments Dell APEX Storage for Public Cloud brings Dell's industry-leading block and file enterprise storage performance and features to public clouds for easy management, data mobility and security  Dell APEX Navigator software simplifies data mobility, storage and container management across multicloud environments Dell APEX Compute delivers high performance compute for organizations to easily scale based on business needs Dell APEX PC-as-a-Service delivers modern PC solutions while allowing customers to free up capital through a predictable subscription Dell Technologies and Databricks to connect on-premises data in Dell object storage with Databricks' Lakehouse Platform for simpler access to data insights Full story Dell Technologies (NYSE: DELL) unveils new Dell APEX offerings across cloud platforms, public cloud storage software, client devices and compute. These additions to the industry's most comprehensive as-a-Service and multicloud portfolio spanning data center to public cloud and client devices1 will help businesses operate and innovate faster through improved management and mobility of their applications and data wherever they reside.

News for Dell Technologies Stock (DELL)