Douglas Rissing
It was revealed over the weekend that the U.S. government’s General Services Administration sent letters last week to 10 technology firms, including Dell Technologies (NYSE:DELL) and CDW (NASDAQ:CDW), asking their executives to justify their contract work and look for savings.
This prompted shares of CDW and Dell to fall by 3.1% and 2.9%, respectively, by the close of Monday markets. The letters were aimed at companies known as value-added resellers, who assemble different technology products and services for the government.
However, industry analysts determined the market reaction was likely overblown, especially in the case of Dell.
“While Dell has not publicly disclosed its U.S. Federal exposure, industry reports and some quick math make us think that the reaction today is overblown,” said Wells Fargo analysts, led by Aaron Rakers, in an investor note. “One data point we found was an industry report from Washington Technology estimating that Dell’s total federal prime-contract revenue in calendar 2024 was $3.04B (56% defense and 44% civilian); +15% y/y and up from $1.82B in calendar 2022.”
Wells Fargo finds that PC sales to the federal government are likely the most exposed to potential cuts.
“We expect that server spending is likely fairly inelastic—and potentially positively impacted by Gov’t modernization efforts,” Rakers said. “Additionally, we think that Dell’s defense revenue representing ~56% of 2024 rev is unlikely to be significantly impacted.”
The bank estimates that Dell’s U.S. business PC revenue ranges from $20B to $24B. Assuming the federal government comprises 15% of those sales, it would affect less than $4B, or about 7%, of total revenue. Conversely, Dell’s commercial revenue is expected to be $43.89B during the current calendar year. Assuming 70% of this is based in the U.S., and 10% of that is federal, it would expose about $3B of PC revenue.
“These are admittedly very rough estimates with Dell having federal exposure through many segments,” Rakers noted.
Wells Fargo retains its Overweight rating and $150 price target on Dell.
Similarly, Evercore ISI found the reaction to CDW overblown as well.
“While CDW’s Public segment represents 37% of total FY25E netted revenues, Government is ~12% of revenues, with the federal government representing roughly half that (~6%),” said Evercore analysts, led by Amit Daryanani, in an investor note. “We believe CDW’s 6% exposure to the U.S. fed is split roughly 50-50 between civilian and defense. Given recent spending reductions across both the civilian and defense sides of the government, we think all of CDW’s federal business could come under scrutiny, though we don’t expect CDW to lose of all its business and view it more likely that CDW reduces the size of current contracts or gives some concessions on pricing on services related agreements.”
Evercore retains its Outperform rating and $215 price target on CDW.
Since January, the federal government has reportedly canceled 11,297 contracts across 60 agencies, leading to $33B in overall savings.