Why JP Morgan thinks Dell is worth US$68 a share

• Dell Technologies' share price up 22% since VMware spin-off announcement
• Wall Street rates Dell stock a 'hold'
• PC maker's Q2 sales expected to fall 4.5% year-on-year

When will Dell report its Q2 FY2021 results?

US computer manufacturer Dell Technologies (NYSE: DELL) is scheduled to report results for the second quarter of fiscal 2021 after market close on Thursday 27 August 2020.

Below, we highlight three key considerations that investors should pay attention to ahead of Dell’s upcoming earnings report.

Dell’s stock up 22% following VMware spin-off news

Dell’s share price has rallied over 22% since the start of June 2020, with investors keeping bullish on the stock even amid concerns of a global recession.

A month later, Dell’s share price was able to top the US$60 mark for the first time since May 2019.

Share price has traded sideways for the most part since then, and last traded for US$60.46 a share on Friday 21 August.

Analysts said the stock’s steady rise in the last couple of months coincided with Dell’s announcement in July on a potential spin-off of VMware in Q4 this financial year, as well as the US tech sector’s boom during this pandemic season.

Following news of the spin-off on 15 July 2020, Dell shares soared 14%.

Additionally, while many small and medium businesses have been adversely impacted by Covid-19, US tech giants like Dell have reversely experienced a surge in demand for their products and services.

Research company Gartner also said in its latest report that global PC shipments rose 2.8% year-on-year in the second quarter of 2020, as vendors restocked their channels and mobile PC demand increased.

The survey also showed that Dell remained the third largest PC vendor in the world in Q2 2020, with 16.4% of total market share.

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Dell rated a ‘hold’ by Wall Street analysts

Across the board, Dell currently has a consensus rating of ‘hold’ from 19 Wall Street brokers, based on Bloomberg data.

The stock has also received an average 12-month share price target of US$60.79 per share, according to the same poll. This represents a small upside of 0.5% from the last traded price.

In terms of specific price estimates, JP Morgan equity researchers previously rated the Dell stock ‘overweight’ alongside a share price target of US$68 a share.

Their valuation for Dell is predicated on higher estimated core earnings per share (EPS) and revenue in fiscal 2022 even post-split from VMware.

‘Importantly, we think Dell will continue to garner share in most enterprise IT categories…especially if the company can maintain a strategic relationship with VMW,’ the analysts wrote.

They added that Dell’s core business could initially trade in the 5.0- 5.5x enterprise value/EBITDA range on a standalone basis, and an implied market cap of US$18 billion to US$22 billion, which equates to US$24 to US$29 a share.

On the flipside, risks included a slowdown in IT end-market spending, as well as Dell losing market share in one or more IT segments.

Meanwhile, Cowen and Societe Generale analysts were more conservative in their estimates, giving the stock a price target of US$63 (‘market perform’) and US$60 (‘hold’) respectively.

Dell’s sales expected to fall 4.5% year-on-year in Q2

Analysts polled by Bloomberg have given a mean adjusted non-GAAP earning per share (EPS) estimate of US$1.372 per share against expected revenues of US$22.445 billion for the computer maker’s Q2.

The projected revenue represents a 4.5% year-on-year decrease from Q2 2020, but a quarterly increase of 2.5% from Q1 2021.

Bloomberg Intelligence analysts wrote that corporate IT capital-spending weakness may be partially offset by some near-term gains for Dell in PCs due to the extended work- and learn-from-home sales in the second quarter results.

While PC strength may not persist through 2020, muted declines could help core Dell segments stem a sales decline to just 5% in fiscal 2021.

Finally, the analysts stated that cost controls may also help Dell's 2021 EPS outperform and reach US$5.93, putting it above consensus.

For existing shareholders, it is also worth noting that the company’s reported adjusted EPS surpassed consensus projections for four of the last five quarters, while revenue exceeded expectations for three of the last five quarters.

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