Dell Looks Ready for a Drop-Off in Fiscal 2024

We cut our fair value estimate for Dell Technologies DELL to $46 per share, from $50, following a good fiscal fourth quarter but rough guidance for fiscal 2024. Dell is seeing demand fall from beneath it across its end markets, which is married with pricing pressure to hamper both sales and margins. Management is guiding for a fiscal second-half road to recovery, but we expect all of fiscal 2024 to be challenged. This particular downcycle is sharp for Dell, yet endemic of its vulnerability to cyclicality across its commoditylike markets that leads to our no-moat rating. Shares dipped 3% after hours, and we still see some upside to our fair value estimate. We caution investors about our no-moat and High Uncertainty ratings on Dell, but its shareholder returns are a bright spot.

Fiscal fourth-quarter sales dropped 11% year over year, exhibiting the dynamics of a downcycle that commenced in the previous quarter after a strong first half of the fiscal year. Dell’s PC sales have been struggling through fiscal 2023, particularly in the consumer market, but now the weakness is bleeding into its infrastructure sales. Storage had a bright quarter, but Dell’s guidance calls for a sharp reversal in the April quarter.

Non-GAAP gross margin of 23.8% and non-GAAP operating margin of 8.7% are strong levels for Dell, and reflect the tremendous quarter its storage business had, which is higher-margin. Still, we anticipate these figures to drop from these highs heading into a harsh fiscal first-half environment.

Fiscal first-quarter guidance is dismal. Dell expects sales to decline 19% sequentially at the midpoint (implying a 22% drop year over year), and for margins to crash back down from pandemic-time high levels. Nevertheless, Dell’s full-fiscal-year guidance implies the first quarter being the worst of the weakness, with a slow recovery to follow.