Investors should have faith in Dell despite near-term challenges, Goldman Sachs said. Analyst Michael Ng initiated coverage of Dell with a buy rating. His price target of $43 implies the stock will gain 15.5% over the next year from where it closed Friday. Weakness in personal computer demand trends are creating headwinds, but he said those should subside soon. That’s because there have been six quarters of weak computer demand, and the typical cycle requires between four and six quarters to hit a bottom, he said. “Although we recognize that DELL’s business is highly cyclical, we believe DELL’s valuation is attractive at 7X NTM P/E and a long-term target of at least 100% FCF to net income conversion to fund shareholder capital returns,” Ng said in a note to clients Monday. Ng also said the company should benefit from the eventual replacement cycle of new computers bought during the pandemic. The company has also guided revenues from its infrastructure and client solutions groups to decline in the mid-teens percentage wise from 2023 to 2024 given the challenging backdrop, Ng said. Beyond slides to enterprise spend, the company has reported early signs of weakening demand for storage, most notably among small and medium-sized businesses. But he said the prospect of a return to growth and demand should improve investor sentiment and that Dell’s servers and storage should make it able to maintain or gain share value. While he forecasted infrastructure solutions group revenue should fall 14% in fiscal 2024, it should grow 4% in fiscal 2025 and beyond. Client solutions groups revenue should also fall 14% in fiscal 2024 before posting 3% growth in fiscal 2025 and 1% in fiscal 2026. The long-term financial model also remains strong with revenue growth between 3% and 4% and per-share earnings growth of at least 6%, Ng said. On top of that, Dell should see at least 100% conversion of net income to free cash flow, with between 40% and 60% of free cash flow getting returned to shareholders. Ng also said the company’s the price-to-earnings ratio of 7 over the next 12 months makes the stock attractive. — CNBC’s Michael Bloom contributed to this report.
