It turns out that
buried the lede.
While the stock (ticker: DELL) was little changed Tuesday afternoon after the personal-computer and enterprise-technology company announced mixed quarterly results, the shares fell after management offered disappointing forecasts about the rest of the fiscal year, with cautionary comments on the outlook for fiscal 2021. On a conference call with analysts and investors, Dell noted weakness in China, said memory prices are likely heading higher, and cautioned that
(INTC) processors were in short supply—a comment echoed by
(HPQ) on its own call.
Intel warned customers of shipping delays in a letter disclosed via a filing with the Securities and Exchange Commission on Nov. 20.
A quick review of the facts: For its fiscal third quarter, ended Nov. 1, Dell posted revenue of $22.8 billion, up 2% year over year, but slightly below the Wall Street consensus forecast of $23.04 billion. Non-GAAP profits were $1.75 a share, ahead of the $1.62 analysts expected.
On the call, CFO Thomas Sweet said Dell is trimming its forecast of revenue for fiscal 2020 to a range of $91.8 billion to $92.5 billion, down from $93 billion to $94.5 billion, and below the $93.5 billion Wall Street expected. He citing the effects of tighter supplies of Intel microprocessors, among other factors.
The full-year forecast implies that fiscal fourth-quarter revenue will be about $1 billion lower than Wall Street expected before Sweet spoke.
Analysts are scrambling to trim their revenue forecasts, and investors are selling Dell shares.
Nomura Instinet analyst Jeffrey Kvaal summed up the situation, saying the company turned in disappointing quarterly results, warned that fourth-quarter revenue will be $1 billion less than Wall Street expected, and provided “dour” commentary on fiscal 2021, all reflecting trouble in China, macroeconomic issues, the Intel processor shortage, and expected increases in the cost of memory. Kvaal said Dell’s target for 4% long-term growth, laid out at the company’s September analyst day, “seems some distance away.” He repeated his Neutral rating on the stock, but lowered his target for the price to $56, from $60.
Wednesday morning, Dell stock was down 5.4%, to $50.31.
Credit Suisse’s Matthew Cabral, who has a Neutral rating and $55 price target on the stock, says the company is “not out of the woods yet,” noting that “the demand environment for enterprise hardware remains soft, particularly for big deals at larger customers with headwinds now expected to linger into FY21.”
And he adds that “margin pressure is ramping as the favorable cost environment fades (and potentially flips negative) and price competition picks up led by servers,” removing a factor that had worked in Dell’s favor for several quarters.
UBS analyst Munjal Shah is Neutral, as well. He said in a research note that the primary news from the call was that operating margin next fiscal year could drop back to the 9.7% level reported in 2019, from the 10.8% expected this year.
“Dell remains focused on its execution and looking for profitable growth across the business segments but we think material valuation improvement is unlikely until the company de-levers its balance sheet,” he wrote.
Write to Eric J. Savitz at [email protected]