Dell: Still Tethered to PC Sales

| About: Dell Inc. (DELL)

Dell’s fourth quarter results are expected to top expectations, but the larger question for the company looms: Can it grow its storage and services business fast enough to overtake its reliance on PCs?

That question was raised in an earnings preview by Collins Stewart analyst Louis Miscioscia, who has been around the industry a long time. Miscioscia was among the first analysts to see Apple’s rebound.

Wall Street is expecting Dell (NASDAQ:DELL) to report earnings of 37 cents a share on revenue of $15.7 billion. Gross margins are expected to be 18.62 percent. Dell’s outlook may be dinged by Intel’s Sandy Bridge chipset flaw. Earlier this month, Dell said the flaw affects the XPS 8300, Vostro 460 and two Alienware products.

Miscioscia’s take goes like this:

  • Dell’s outlook last quarter was conservative.
  • A strong corporate IT buying cycle should boost Dell.
  • But 71 percent of its product mix is still tethered to lower margin and slower growth PC sales.
  • It’s unclear at this point whether new areas such as servers, storage, networking and services can be large enough or grow fast enough to counter a dependence on PCs.

Indeed, PC sale data from the likes of Gartner and NPD have been lackluster.

“We do believe management is doing many things right but the transformation is taking time,” said Miscioscia. The task for Dell: grow servers and storage faster than the market to offset what’s likely to be a slower-growth PC business. In other words, Dell is going to have to be more aggressive with acquisitions, but the window for big transforming deals is closing.

In any case, Dell’s fourth quarter may look a lot like the ones before. Decent results and talk of more diversification and acquisitions to change the product mix. Fortunately, Dell has a few economic tailwinds.

“IT spending is recovering in conjunction with improving global macro economic trends led by spending in storage, servers (migration to private and public clouds), followed by PCs. After 12-18 months of depressed investment, Corporates started to invest in infrastructure upgrades last year,” said Deutsche Bank analyst Chris Whitmore. Dell is likely to win some of those deals.

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