Fountainheadinvesting

Investing in Dell: A Strategic Buy for Long-Term Growth

Dell (DELL) $110-$115 Buy 3 Years Annual Return 11-13%+dividends, spread the buying out the stock jumped after hours, but there is still upside left long term.

This is from my October 23 article recommending SMCI – “Super Micro competes with behemoths like Cisco (CSCO), Dell Technologies (DELL), and Lenovo”. However, I didn’t buy Dell subsequently, their infrastructure solutions group  is about 40% of their revenue and servers half of that – I wanted to see more evidence that they would be getting meaningful revenue from the datacenter boom. 

This quarter they did as Dell’s Infrastructure Solutions Group produced $9.3B in revenue up 10% from the prior quarter. Servers and networking revenue hit $4.9B, driven primarily by AI-optimized servers. Projected growth in unstructured data from AI should benefit Dell’s storage business as enterprise and large corporate customers are in the early stages of AI adoption. AI-optimized server orders increased by nearly 40% sequentially, $800 million of AI-optimized servers, and backlog nearly doubled sequentially, exiting the fiscal year at $2.9 billion. 

From their earnings call “Demand continued to outpace GPU supply, though we are seeing H100 lead times improving. We are also seeing strong interest in orders for AI-optimized servers equipped with the next generation of AI GPUs, including the H200 and the MI300X.” 

Even after this quarter AI related revenue is less than 10% but growth will come from 3 areas, servers, storage and services.

Company wide revenue growth is expected to be only mid single digits this year, with better growth of 7-8% in the years 2025 and 2026.

I estimate earnings to grow much faster at around 12% for the next three years. As a cyclical, Dell gets low multiples and I wouldn’t assign more than 16x, so at 2026 earnings of $10, we should target a price of $160. About 12% a year.

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Semiconductors

Teradyne’s Weak 2024 Outlook Sparks Concerns, While Advantest Surges Ahead

Teradyne’s guidance was a big disappointment – they’re forecasting zero growth for 2024, mainly because the first two quarters will be lower but growth will pick up in Q3, Q4. Consensus estimates were for 10% growth in 2024.

Even as end clients like Cloud Service Providers and hyperscalers have bought more semiconductors in the last 6 months, capacity utilization of Teradyne’s testing equipment is still low and new buying of equipment will not be triggered till capacity is used up. This isn’t always a linear relationship, and often there are lags. Second – mobile and PC’s markets have also not increased demand and Teradyne will not get visibility till April for mobile phones demand (read Apple via TSM, which is their largest customer).

Management believes that there is little downside left, and they see utilization rates improving and unit growth in PC’s and smartphones could be a tailwind in the second half. They are still maintaining 2026 estimates of $4.3Mn and over $6 in EPS, but they have a lot of catching up to do.

Contrast this with closest competitor, Advantest (ATEYY), which surprised this morning and increased guidance by 2-3% for the next quarter.. They’re expecting a great second half as well.

I have more Advantest than Teradyne and it’s also done much better for me. If things don’t improve at Teradyne I may just focus on Advantest.