Dell: I Am Buying The Drop (Technical Analysis)

Summary:

• Dell Technologies is emerging as a key player in AI, with significant capital spending and a strong performance in AI server orders.
• Despite a recent earnings miss and a 14.42% stock drop, Dell’s valuation remains attractive compared to industry peers, presenting a buying opportunity.
• Dell’s forward price-earnings and price-sales ratios are favorable, suggesting limited downside and potential for a reversal recovery in share prices.
• I maintain a bullish outlook with a “buy” rating, expecting Dell to recover heading into the final trading periods of 2024.

As we head into the final parts of 2024, we can see that there are several important themes that have defined the financial markets during this period of time. Perhaps most important has been the ramp-up in capital spending that has been devoted to artificial intelligence applications. Key questions still remain with respect to whether or not hyperscalers are actually generating sufficient returns to justify all of this spending. However, it has become quite clear that Dell Technologies Inc. (NYSE:DELL) is emerging as a more important player in the industry and recent reports have been seen which suggest that Elon Musk plans to shift a massive $6 billion server order to the company. On a YTD basis, DELL stock is still outperforming the S&P 500 by a wide margin (at 66.3%) but share prices have taken a major tumble following the company’s most recent earnings release. Overall, I believe that this recent decline is presenting investors with an interesting opportunity to consider purchasing the stock while share prices are still trading at these lower levels but there are a few potential negatives that must be highlighted, as well.

During the fiscal third-quarter period, Dell Technologies generated very strong adjusted per-share earnings of $2.15 (surpassing consensus estimates by 4.37%) but the company’s revenue figure ($24.4 billion) did fall short of expectations. Ultimately, these figures were received poorly enough by the market to bring fairly heavy selling pressure, and the stock quickly gapped lower by more than -14.42% to reach near-term lows of $121.30. Oftentimes, downside reactions are capable of building momentum at rates that are much faster (and more sizable) than what might typically be seen during rallying periods. In my own trading, one of the strategies that I have navigated most successfully during my career has been to identify what I believe to be irrational (or over-extended) price moves and establish contrarian positions based on prospects for reversal. Most of the time, I implement these strategies during trading periods that follow earnings reports, and I have established a new long position in DELL stock following the company’s latest earnings release.

In large part, the reason I am viewing recent declines in DELL as an overreaction comes from the fact that purchase orders for servers used in artificial intelligence applications reached an all-time high (at $3.6 billion). In addition to this, Dell’s pipeline is now growing at a rate greater than 50% and net income figures rose to $1.12 billion for the quarter. On the downside, Dell’s revenue guidance for the current-quarter period came in below consensus estimates (of $25.6 billion) and posted with a $24-25 billion range. Most of this potential weakness in revenues is centering around potential disappointments in segments outside of the company’s artificial intelligence offerings (for example, in storage and personal computers).

Ultimately, this means that a lot more is riding on Dell’s Infrastructure Solutions segment (supplying artificial intelligence servers and network components), which did see total revenue growth of 34% during the third-quarter period (at $11.4 billion). Within this segment, the subsidiary devoted to networks and servers generated $7.4 billion in revenues (and annualized growth rates of 58%), while shipping artificial intelligence servers totaled a slightly reduced figure of $2.9 billion ($3.1 billion was reported during the prior quarter). As a result, this is the category that I will be watching most closely when the company releases its next earnings figures for the fourth-quarter period, as management has explained that future orders for artificial intelligence servers have already reached $3.6 billion.

Given the fact that a few of these earnings results are somewhat mixed, I think it is constructive to assess DELL based on its comparative forward valuation metrics within its industry peer group. If we use the stock’s forward price-earnings metric, we can see that the company is currently trading with a valuation of 15.9x, and this figure has been increasing steadily since the beginning of 2023. Looking at other stocks positioned within the artificial intelligence component industry, several companies are trading with higher valuations. For example, NetApp, Inc. (NTAP) has a forward price-earnings ratio of 16.75x and Broadcom Inc. (AVGO) is trading at more expensive levels (25.77x). Nvidia Corp. (NVDA) is far more expensive than the rest of the group (at 45.82x) but there are still two companies that are trading at cheaper valuations. These stocks can be found with Super Micro Computer, Inc. (SMCI) at 12.42x and Hewlett Packard Enterprise (HPE) at 9.889x.

If we change the valuation metric to view these companies based on their forward price-sales ratios, Dell’s position looks a bit more favorable (at 0.908x). At the same time, NetApp trades with a ratio of 3.748x while Broadcom is associated with a forward price-sales metric of 12.33x. Again, in this case, Nvidia is trading at much more expensive levels (at 25.67x), so most of the companies are looking less attractive than DELL at the moment. By contrast, Hewlett Packard Enterprise (at 0.843x) and Super Micro Computer are the cheapest stocks in the group (at 0.822x). Of course, we must remember that Super Micro is currently caught up in the midst of its own problematic issues, so these comparative valuations must be taken with a grain of salt.

Since we can see that Dell Technologies is attractively valued on a comparative basis, it is also important for investors to assess the stock on the basis of its own price history. In light of the recent declines in share prices, critical questions remain with respect to the possibility that the stock might have formed a near-term bottom. Specifically, share prices have fallen into the 38.2% Fibonacci retracement of the bullish trend-wave movement from the August 5th, 2024 lows of $86.93 to the November 25th, 2024 highs of $147.66 (which is located near $124.30). From the shorter-term perspective, indicator readings in the relative strength index on the hourly time frames have started to roll over, out of oversold territory. All combined, this creates a confluence of events that suggests further downside in DELL share prices might be limited now that the stock has seen such sharp declines following the company’s third-quarter earnings report. In order for me to reverse this viewpoint and begin to expect further negative trend wave movements, I would need to see the stock break below the October 2nd, 2024 lows of $112.12 because losing this critical support zone could accelerate momentum to the downside if invalidated. As long as we do not see further declines that surpass this important support zone, I will be holding my current long position and maintaining my bullish outlook with a “buy” rating while expecting to see a reversal recovery in this declining stock heading into the final trading periods of 2024.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of DELL, NVDA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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