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Investment Overview for Dell (NASDAQ:DELL)
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Below are key drivers of Dell's value that present opportunities for upside or downside to the current Trefis price estimate for Dell:
Notebooks & Netbooks
- Dell Notebooks & Netbooks Market Share: We currently forecast Dell's share in the notebooks & netbooks market to decrease from about 12.6% in 2011 to ~5% by the end of the Trefis forecast period. There could be ~5% upside to the Trefis price estimate if Dell's market share increases going forward, reaching pre-recession level of ~14.0% by the end of our forecast period.
- Notebooks & Netbooks Gross Profit Margin: We currently forecast notebooks & netbooks gross margin to reduce slowly to 18% going forward. There could be 15% upside to the Trefis price estimate if the gross margin continues to increase reaching 25% by the end of our forecast period. On the other hand, if gross margin declines to the 2009 low of ~14%, there will be a downside of over 15% to our price estimate for Dell.
Services
- Dell Services Revenue: We currently forecast that Dell services revenue will increase from $8.3 billion in 2011 to about $12 billion by the end of Trefis forecast period. There could be a 4% downside to the Trefis price estimate if the services revenue grew at a slower rate to about $10 billion during our forecast period.
- Services Gross Profit Margin: We currently forecast services gross margin to remain flat, at around 30% going forward. However, there could be a 20% upside to the Trefis price estimate if margins were to re-bound to its pre-recession levels of 40% by the end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Dell at the top of the page.
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Dell is known primarily for its product line of desktop and notebook PCs, printers, and PC displays. However, much of Dell's value comes from higher profitability businesses, such as managed services and consulting, through which Dell provides business customers with services. Examples of these services include desktop outsourcing and IT call center support.
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Notebooks Still a Major Business for Dell
Dell is diversifying its product and services portfolio with a focus on enterprise customers. Despite the shift away from its core PC business, notebooks and netbooks continue to drive significant portion of Dell's value.
In fact, notebooks and netbooks account for about 18% of Dell's value according to our estimates. Combined with desktops, the contribution of the PC business to Dell's value amounts to about 20%. This is primarily due to the fact that Dell continues to command nearly 10% share of the global PC market.
Services are a High Margin Business
Dell's services revolve around desktop outsourcing and consulting services.
In addition to desktop outsourcing, Dell offers managed services that include desktop management (both hardware and software), data handling, security services, crisis management during systems failure, and email management.
Dell's consulting services include infrastructure consulting, asset recovery and recycling, deployment services, training services, and support services. Support services are based out of offshore locations, such as Malaysia, India, and China.
The services business has low fixed costs, which is why it contributes significantly to Dell's valuation.
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Discretionary Nature of Consulting
The discretionary nature of consulting and other services (except support services) put them at risk for a decline in a slowing economic environment. Support Services should not be impacted much, given the low cost base and the on-going nature support services.
Desktop Outsourcing Dependent on Desktop Sales
The desktop outsourcing business is dependent on desktop sales, and we expect global desktop shipments to slow down significantly.
Rising Popularity of tablet PCs
With the launch of Apple's iPad in 2010, the demand for tablet PCs has increased at a rapid rate. We believe that this trend will continue as both phone and PC manufacturers like RIM, Motorola Mobility, Samsung, HP and Dell enter into the tablet market.
While Dell's plan to enter the market in 2011 has not paid off, we believe the company will try to re-enter the market by launching a fresh line of tablets based on the Windows 8 operating system in late 2012, targeting both consumers and enterprises.
If Dell manages to capture market share with its Windows 8 based tablets, there could be a meaningful upside potential to the company's value.
Desktop Shipments Slow Down
There is an on-going mix shift towards notebook, netbook and PCs, as they become more powerful and affordable.
Also the PC business is mostly a commodity business with very low margins. Low margins may be acceptable if volumes remain high; however with the desktop market estimated to slow down significantly, profitability of Dell's desktop business may go down.
Fate of Displays Tied to Desktops
The upgrade cycle to LCD monitors saw Samsung takeover Dell as the market leader due to its leadership in the stand alone monitor market.
Since displays are most commonly sold along with desktops, Dell's display business is dependent on the slowing desktop business.
Limited market share in the slowing printer market
Dell is a very small player in the printer market with less than 5% market share. Growth in the broader printer market has slowed due to the emergence of notebooks and wireless networks for printer sharing. These factors might pose a threat to the profitability of Dell's printer business going forward.
Trefis Forecast Rationale for Server Shipments
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${forecast} implies the total number of server units that Dell sells in a year.
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Dell's server shipments increased from 1.9 million units in 2007 to 2.1 million units in 2008 before falling to 1.7 million units in 2009. The fall in server shipments in 2009 was primarily due to slowdown in the economic environment which affected the enterprises' hardware expenditure.
In 2010, server shipments increased back to 2.1 million units as the economic environment improved; resulting in increased demand for servers.
In 2011, ${forecast} increased by only 2% remaining in the ~2.1 million unit range.
Going forward we forecast a slow and steady growth in shipments largely driven by virtualization in the server space and we expect it to reach ~3.5 billion units by the end of our forecast period.
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- Server virtualization and consolidation will drive need for newer servers to replace older ones
- Server virtualization is essentially server consolidation that enables the running of multiple applications on a single server instead of on multiple servers.
- The primary benefit of virtualization is reduced cost of hardware, electricity, and service.
- Server virtualization requires multi-core processor servers, which tend to be more complex and more expensive than traditional single core processors.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
DCF MethodologyView All Help Topics