Shares in Dell Technologies (DELL) rose 6% in Friday’s trading, after the tech giant reported a solid earnings beat.
Specifically, FQ2 Non-GAAP EPS of $1.92 beat Street estimates by $0.52, while GAAP EPS of $1.37 also topped forecasts by $1.59. Although revenue fell 2.8% year-over-year, at $22.8B it still beat Street expectations by $300M. Adjusted EBITDA was $3.1B- significantly higher than the consensus of $2.5B.
“In Q2, we saw strength in the government sector and in education, with orders up 16 and 24 percent, respectively, as parents, teachers and school districts prepare for a new frontier in virtual learning” commented Jeff Clarke, Dell COO.
Meanwhile client solutions revenue came in at $11.2B, vs the $11.52B consensus. Consumer revenue was $3.2B, up 18% year-over-year, while commercial client revenue was $8B, down 11%.
Following the report RBC Capital’s Robert Muller upgraded the stock from Hold to Buy while significantly raising his price target from $48 to $80 (21% upside potential).
“With a VMware (VMW) spin on the table, we see a clear path by which Dell can unlock the value of its stake in VMW” the analyst cheered, adding that the potential value unlock is too large to ignore.
As part of Dell’s announcement that it is exploring a VMW spin-off, the company cited a special dividend and commercial agreements as part of any consideration, noted Muller.
According to the analyst, at current prices, each share of Dell would receive ~$62 of VMW, or $80 based upon RBC Capital’s Matthew Hedberg’s VMW price target of $185. This means that at today’s price, a VMW spin would provide a nearly free call option on surviving Dell, says Muller.
He continued: “In addition, we believe Dell’s steadily improving balance sheet is positioned to withstand additional COVID-19 (or other) macro shocks, and we have increased confidence in Dell’s ability to deliver on its longer-term objectives, including achieving investment grade ratings.”
Overall, DELL shows a cautiously optimistic Moderate Buy Street consensus with 7 recent buy ratings vs 4 hold ratings. With shares up 29% YTD, the average analyst price target of $65 indicates a slight downside potential from current levels. (See Dell stock-price forecast on TipRanks)
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