Investors will get new insights into the state of the personal computer business on Thursday, as both Dell and
report July quarterly results after close of trading.
Both stocks have performed well this year – Dell (ticker: DELL) is up 37%, while HP (HPQ) is up 18% – driven by a surge in demand for PCs driven by the pandemic. But gains have moderated lately amid significant counter-currents that could show up in both the July quarterly results and guidance.
For starters, as schools and offices reopen, the growth in consumer demand for PCs was expected to slow and business demand to pick up. There is already clear evidence of declining demand for Chromebooks, a bigger factor for HP than for Dell. But that dynamic has been clouded by the rise of the Delta species, with some companies now delaying reopening their offices. Meanwhile, component shortages and increased shipping costs have become a factor for every tech hardware company and will continue to be a factor for both companies.
Indeed, the market research firm International Data Corp. this week lowered the forecast for 2021 for global PC shipment growth from 18% to 14.2%, due to “supply chain and logistics challenges”. IDC sees a compound annual growth rate of 3.2% for PCs through 2025, with the number of tablets expected to decline by 1.2% year-over-year.
While the state of the PC market is important to both companies, there are also company-specific dynamics to keep an eye on.
For HP, a return to offices should boost its business printing business; investors will listen to comment on whether the Delta variant will impact an expected increase in demand for printers and supplies. Meanwhile, HP has aggressively repurchased its own shares — repurchasing 17% of its float over the past four quarters — and has pledged to repurchase at least $1 billion of its shares each quarter. The company is likely to provide an update on its capital allocation strategy.
Dell’s business includes enterprise server and storage products that should benefit directly from a recovery in the company’s IT spending – and the company’s enterprise PC business should benefit from the same factor. Meanwhile, investors await the completion of the company’s spin-out from its majority stake in
(VMW), which is expected to close before the end of the year. That transaction includes a large dividend back to Dell, which it plans to use to significantly reduce debt. VMware will also announce financial results on Thursday.
HP has forecast non-GAAP earnings of 81 cents to 85 cents per share for the third quarter; the street consensus is 84 cents. The Street sees revenue of $15.9 billion, which would be equal to the April quarter, and about 11% higher than a year ago.
Dell does not provide a detailed financial outlook as it expects continued strong demand for the last quarter, but with sequential growth in the July quarter of slightly less than the historical average seasonal increase of 6%, largely due to supply constraints. Street consensus estimates expect revenue of $25.5 billion, which would be a 4% sequencing, and 12.3% year-over-year, with earnings of $2.03 per share.
Citi analyst Jim Suva maintains his buy recommendation for both Dell and HP. He notes that there has been some pressure on both stocks amid fears of declining order momentum, with demand for consumer PCs in general and Chromebooks in particular slowing down in particular. But he thinks the fear of a sharp decline is exaggerated.
Suva writes that Dell remains its top pick in enterprise hardware, and sees a potential for the stock to “revalue” higher, aided by the VMware spin and a planned related debt service.
Evercore ISI analyst Amit Daryanani also has an Outperform rating for both companies, but has a preference for Dell stocks. He thinks the company will show a “significant advantage” over consensus estimates, driven by stock gains in PCs and “better execution” on corporate storage, and expects a lot of attention will be paid to the post-earning analyst call on the outlook for the future. the company upon completion of the VMware spin.
For HP, Daryanani is a little less optimistic, noting that the company has lost some market share recently, likely due in part to declining demand for Chromebooks.
On Tuesday, both HP and Dell shares traded fractionally higher.
Write to Eric J. Savitz at firstname.lastname@example.org