In the 1990s, hardly a stock was hotter than Dell Computer. Many employees there became “Dellionaires” as the stock skyrocketed through the decade and split countless times. Eventually, founder and computer legend Michael Dell took the company private, and the entity reemerged in the summer of 2016 as Dell Technologies Inc. (NYSE: DVMT), formed as a result of the merger of Dell and EMC Corporation.
The company reported solid numbers last week, and a new Stifel research report makes the case that the outstanding quarter is very bullish for three companies on which they have Buy ratings. The report said this about the Dell numbers:
Dell reported revenue of $22.2 billion and an operating margin of 9.5%. The company saw positive year over year top line performance in both its PC business and Infrastructure Solutions group. Operating margin was down ~50 basis points or ½% sequentially due to sequentially lower margins in the infrastructure solutions and clients solutions groups. Total core debt levels were reduced by ~$400 million sequentially and ended at $39.9 billion.
Here are three companies that Stifel feels could see a direct benefit from the Dell report.
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Intel
This semiconductor leader is working hard to scale away from dependence on personal computers and the Internet of Things and data center cloud spending are a big part of the shift. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide. Its platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.
Intel’s “data-centric” businesses now accounts for about 45% of revenues, versus less than 40% three years ago. The Data Center Group is poised to grow by high-single-digit percentage points over the next few years. In addition, many feel that Intel’s cloud hyperscale customers will continue to spend aggressively on cloud computing infrastructure over the next few years. This growing silo of business combined with the company’s legacy products make it a solid and reasonable stock to own for 2018.
Given the big exposure to Dell, the analysts said this:
Intel has ~55% PC exposure, mainly in its Client Computing Group segment. We model CCG growing ~12% q/q in the March quarter. Intel does not provide segment guidance and guided total revenues down quarter over quarter to $15.0 billion in the March quarter from $17.1 billion in the December quarter. Intel has significant exposure to Dell (~16% of sales) within both CCG and DCG. Given INTC’s 90%+ market share within the PC and server processor industry, we believe that Dell’s PC and server data points have broadly better implications for Intel.
Intel investors receive a 2.3% dividend. The Stifel price target for the shares is $55, and the Wall Street consensus price objective is $53.03. The shares closed day Friday at $52.19.
CDW
CDW Corp. (NASDAQ: CDW) came back from private equity land over four years ago and has done outstanding since. It provides information technology (IT) products and services to business, government, education and health care customers in the United States and Canada. It offers discrete hardware and software products to integrated IT solutions, such as mobility, security, data center optimization, cloud computing, virtualization and collaboration.
This stock has been highlighted in the past as having virtually no exposure to China and as a very attractive and somewhat defensive small/midcap play for investors. Analysts also think that the company has benefited from the integration of U.K. IT services and solutions provider Kelway.
The analysts have cited in the past the unique culture and the compensation structure, and the Dell Partnership as among the top reasons to own the stock. They noted this in their report:
CDW expanded its channel partnership relationship with Dell in 2016. The expanded relationship added over 150 basis points or 1.5% ($200 million +) to CDW’s top line growth in 2016. We think the potential for this relationship remains a $1.5 billion opportunity. Dell’s PC/server results should be a positive for CDW.
CDW investors receive a 1.14% dividend. The $80 Stifel price target is about the same as the consensus target of $79.83. Shares closed Friday at $74.38.
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Western Digital
This long-time innovator in the storage industry is a leader in the total addressable HDD market. Western Digital Corp. (NASDAQ: WDC) is an industry-leading developer and manufacturer of storage solutions that help to create, manage, experience and preserve digital content.
The company is responding to changing market needs by providing a full portfolio of compelling, high-quality storage products with effective technology deployment, high efficiency, flexibility and speed. Its products are marketed under the HGST and WD brands to original equipment manufacturers, distributors, resellers, cloud infrastructure providers and consumers.
Western Digital stock traded down after earnings despite being above Wall Street earnings expectations for the fourth quarter and fiscal 2018, as investors were concerned about peak margins. The analysts feel that NAND supply-demand will not come into balance until mid-calendar 2018, creating forward upside potential.
The analyst report noted that PCs account for 50% of hard disk drive sales, and the improved performance at Dell bodes well for the company in 2018 and beyond.
Shareholders receive a 2.0% dividend. The Stifel analysts have a $120 price target. The consensus target is $113.63. The stock closed on Friday at $99.55.
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Three top technology companies that could see a direct benefit of the solid gains at Dell Technologies. Their stocks make good sense for growth portfolios with a higher degree of risk tolerance.
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