Dell: Low End of Server Market Accelerating - Morgan Stanley

Morgan Stanley’s Kathryn Huberty asserted in a research note this morning that there has been an acceleration in volume growth at the low end of the server market. She says the trend “is not yet priced into stock.”

“Over the past two years,” she writes, “virtualization drove a shift to higher priced systems.” But now she says the trend is reversing “as lower priced servers are good enough for many enterprises,” in part due to the emergence of new multi-core microprocessor. She says this is good news for Dell (DELL), but not so good for Sun (JAVA).

Ergo, she raised her rating on Dell to Overweight from Equal Weight. She notes that more than 40% of the company’s operating income comes from enterprises revenues, and contends the company will take market share. She notes that “Dell’s sweet spot is at the low end,” that Dell often has the most competitively priced systems, and that recent acquisitions have broadened its portfolio to include storage and services. Huberty raised her 208 EPS estimate for the the company to $1.55 from $1.40.

Meanwhile, she cut her rating on Sun to Underweight from Equal Weight. “We believe Sun’s server market share and recent margin expansion (up 360 bps in C07 due to high-end server mix and software/services sales) are at risk as demand shifts downstream and pricing intensifies,” she writes. Huberty cut her 2008 EPS estimate for the company to 62 cents from 78 cents; for ‘09 she drops to 93 cents, from $1.26; for 2010 she sees 80 cents, down form $1.35.

Huberty also reiterated her Overweight ratings on both Hewlett-Packard (HPQ) and IBM (IBM).

Comments

[User 169377]

Dell may do slightly better in the low end server market due to the weak economy, however I find it interesting that nothing is mentioned regarding Dell's other products. Are its laptops and desktops also going to overcome the weak economy? Certainly not on the consumer end as those purchases can and will be delayed.

Will the supposed increase in server sales more than outweigh the decrease in it's other sales? I haven't crunched the numbers, but I would highly doubt it. The weak economy will take nearly all companies down with it, to imply otherwise without facts is misleading.