Due to realignment of analyst coverage, we are withdrawing coverage of the following equities: AAPL, ANET, CSCO, DELL, FLEX, HPE, HPQ, IBM, JBL, JNPR, NTAP, NTNX, and PSTG. Our final ratings, price targets, and estimates should no longer be relied upon.
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DELL reported F3Q earnings yesterday after the close, posting a 7% beat against our $1.63 estimate. However, the stock traded down 4% in the aftermarket on light server revenues and commentary around worsening macro; F20 revenue guidance was cut by 2%. DELL has executed through the macro backdrop better than most in our coverage thus far this year, but it finally capitulated to the deal lengthening impacts seen by others at larger enterprise accounts. We continue to prioritize growth amongst our names; near-term growth expectations for DELL through the balance of F20 have been reduced from 5-6% to 1-2%. But we continue to believe that breadth/depth wins in the current environment and see enough near-term catalysts to provide a return to mid-single digit topline growth.
We detail our quarterly VAR survey, where we queried 51 value-added storage resellers globally in October for business in July-September. We provide both industry and company level results and walkthrough the stock related takeways.
IDC published worldwide PC shipments (exhibit 1) this afternoon (10/10/19) signaling a market units increase of 3.0% YoY in 3Q. Solid commercial demand as well as tariff impact (desktop enacted on 9/1) were highlighted as drivers. Sequential performance (vs. 3.7% growth in 2Q) was impacted by incremental supplier component constraints (Intel) as well as elasticity from pushout of notebook tariffs to December. That said, tailwinds for 4Q should include an uptick in commercial demand on Windows 10 refresh as well as increased sell-ins to pre-empt 12/15 tariffs.
Yesterday’s investor day reminded us of the balancing act: use size/incumbency to drive growth while carefully managing considerable leverage. Emphasis was still placed on achieving relative share growth, with margin dropping down to free cash flows as the key objective. Commentary on an enhanced focus on higher end storage as well as a reiteration of efforts behind mainstream servers. The stock traded down 3% on slightly revised down LT growth targets, but we continue to see more favorable set of company specific growth drivers relative to peers and see commentary around de-levering as an incremental derisking event.
DELL hosts its annual investor day this Thursday (9/26). Topline growth should be in-scope. Despite bottom line execution through vs. peers in through an increasingly tenuous macro backdrop in 2019, YTD stock performance is merely in line with the group. We are looking for the following: 1) refresh of LT segment revenue growth targets with increased transparency to achievement 2) update around “better together” narrative, including customer overlap metrics and ability to drive incremental synergies and 3) identifying further levers to pull to narrow the 30% valuation discount.
DELL capped off our earnings season yesterday (8/28/19), reporting F2Q20 earnings after the close. Against a backdrop of most of our hardware names posting either margin expansion or derisked revenue trajectory, DELL delivered both: inline revenues paired with a 180bps gross margin beat vs. our model. EPS exceeded consensus by ~$0.70 and the F20E guide was raised; the stock was up 9% in the aftermarket. DELL has navigated the macro better than most in our coverage since concerns started to elevate in Jan/Feb. In the current environment, we continue to like a scale player that can capture on-prem share.
VARs see overall IT budget spend likely growing, albeit in the low single digits. One reseller mentioned that business had a sudden stepdown entering July. Another touched on global uncertainty; European deals stepped up CIO supervision in 70% of cases, leading to 20% uptick in sales cycle length. Overall, VARs recognize that 2018 provides a tough compare for enterprise spending, potentially exacerbated by recent signals of weakness, but they continue to see IT capture a larger share of overall corporate budgets.
We surveyed 50 value-added resellers of storage in the US, Europe, and APAC. The survey was taken in July, asking about April-June business though we may have picked up some July views. Takeaways include (1) the outlook for overall IT spending in 2019 improved over last quarter; (2) storage spending stepped down sequentially with nearly 75% reporting fair/ok sales strength; (3) NTAP’s outlook worsened vs. the prior period, while DELL sales and outlook remained steady (4) discounting ticked down across our coverage with DELL & PSTG seeing the largest changes.
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