Could Dell’s Cloud Push Complete its Transition to a Service Firm?

In a recent announcement, Dell (NASDAQ:DELL) unveiled its plans to invest $1 billion into its cloud computing push with the opening of 10 data centers over the next 24 months. Dell’s move comes after technology giants IBM (NYSE:IBM) and HP (NYSE:HPQ) have placed cloud services at the core of their growth strategy. Dell derives nearly 19% of its stock value from service offerings by our estimates, making this business division the second largest value driver for the company. We have a $22.39 price estimate for Dell’s stock, about 50% ahead of market price.

Dell To Offer Cloud Services

The cloud services market is expected to continue its rapid growth crossing $102 billion in 2012 at a roughly 50% increase from $68 billion in 2010. ^[1]

Dell, which in the past has gone from being a PC vendor to a more service oriented firm aims to target its existing small and midsize customers with these cloud services. The customers will be able access programs and information over the Internet that will be run and stored on Dell-operated data centers, thereby eliminating the cost of operating the equipment themselves. This could lead to higher technology infrastructure revenues for Dell in the coming years.

We currently estimate that Dell’s technology infrastructure outsourcing revenues will increase from $700 million in 2010 to $900 million by the end of our forecast period. But if revenues from this segment gain momentum and reach $1.2 billion by the end of our forecast period, the services business division would become the largest value driver for Dell, surpassing notebook & netbook sales.

See our complete analysis of Dell stock here

1. Dell Seeds ‘Cloud’ Business, Wall Street Journal [↩]