As we approach Dell’s (DELL) Fiscal second-quarter earnings report on August 29, I maintain a cautious stance on the stock. While Dell’s recent performance has shown strengths, particularly in its server business, there are still some concerns that temper my enthusiasm. Although the valuation seems more de-risked after last quarter’s post-earnings sell-off, the market’s modest expectations and Dell’s significant exposure to a sluggish PC market highlight potential downsides.
In this article, I’ll break down why I’m skeptical about Dell’s near-term prospects despite some reasons for optimism.
Dell’s Q1 Recap: Solid Results, But Shares Remain Under Pressure
My skepticism about Dell stock, as highlighted in my previous article, stems from the company’s performance last quarter compared to its valuation. To recap, Dell’s FQ1 2025 results were solid, exceeding expectations and showing strong performance in its server business within the Infrastructure Solutions Group (ISG) division. However, the stock still faced a significant sell-off following the earnings release.
The primary issue was the soft guidance provided by the company, partially impacted by AI-optimized servers. Dell cited inflationary input costs and a competitive environment, forecasting a decline in the gross margin rate by roughly 150 basis points.
Although Dell’s stock started the year strong, climbing from $80 per share to nearly $180, recent market turbulence has driven the stock back down to around $100 per share, up 36% year-to-date.
Another factor contributing to these losses was Super Micro Computer’s (SMCI) latest earnings release, which showed the company experiencing lower profit margins. Additionally, SMCI announced plans to offer competitive prices to gain market share.
This is never good news for an industry when a key player begins to focus on competitive pricing to gain market share, putting pressure on Dell’s stock price.
Currently, Dell is trading at a forward price-to-earnings ratio of just 12.9x, which is at the lower end of its trading range for the year (after reaching more than 25x earlier) but still significantly higher than pre-2024 levels, before Dell began capitalizing on AI advancements. Nevertheless, this current momentum suggests more de-risked multiples, supporting greater optimism for Dell shares from a valuation perspective.
What to Expect from Dell’s Fiscal Q2 Earnings Report
While the valuation no longer appears to be a major issue for Dell shares ahead of earnings, other concerns still justify my neutral stance on the company’s prospects. First, the market is anticipating Dell to deliver FQ2 earnings per share of $1.68, reflecting a roughly 3% year-over-year decrease, and revenues of $24.1 billion, indicating a 5% increase in the top line.
These expectations appear quite modest, given the bearish sentiment surrounding the Fiscal second quarter. Over the past three months, 12 out of 15 analysts have revised their EPS projections downward for Dell, while all analysts covering the stock have lowered their revenue forecasts.
The primary reason for this skepticism is Dell’s significant exposure to the PC market. In the last quarter, nearly 53% of the company’s revenue came from Client Solutions Group (CSG), which is struggling. The segment reported first-quarter revenue of $12 billion — flat year-over-year.
However, Dell’s growth story lies within its Infrastructure Solutions Group (ISG), which delivered first-quarter revenue of $9.2 billion, up 22% year-over-year. This growth was particularly strong in Servers and Networking, where revenue reached a record $5.5 billion, up 42%, driven by strength in both AI and traditional servers.
Despite this strong performance in ISG, the broader outlook for Dell remains tempered by challenges in its Client Solutions Group (CSG), which continues to weigh down the company’s overall growth prospects. As a result, the current expectation is that Dell will not experience significant growth in the near term or over the next three years. Investors should, therefore, temper their expectations for rapid growth from Dell Technologies in the upcoming quarter.
On the positive side, personal computer sales are expected to recover strongly starting in the second half of this year. This recovery is anticipated to continue into 2025 and 2026 as artificial intelligence begins to be integrated into personal computers. Additionally, many of the devices purchased during the early stages of the pandemic will need to be replaced, further boosting sales.
Dell is well-positioned to benefit from this replacement cycle. However, that segment of the business is not expected to grow rapidly, even during the replacement cycle, and especially beyond it.
Is DELL a Buy, According to Analysts?
Even though I remain cautious about DELL shares, Wall Street analysts are quite bullish on the Round Rock, Texas-based company. Dell currently holds a Strong Buy rating from the 12 analysts covering the stock. Notably, Barclays’ (BCS) Tim Long, who was previously the only bear on Dell, recently upgraded his stance to a Hold. The average DELL stock price target is also optimistic at $158.50, suggesting upside potential of 54%.
Key Takeaways
The market is eager for growth, but Dell is unlikely to deliver much in this regard, as it is not a pure-play AI company. DELL stock has been under pressure due to concerns about its exposure to the PC market and competitive challenges despite strong performance in its server business.
While the company’s valuation has become more reasonable, modest expectations for Fiscal Q2 earnings reflect broader skepticism. Although Dell is well-positioned to benefit from AI-driven growth, its overall growth may remain constrained in the near term. Investors should temper their expectations ahead of FQ2 and focus on Dell’s long-term potential rather than anticipating rapid gains in the upcoming quarters.
