Thursday, February 27, 2020

China Poses Challenge To Dell Beyond the Virus

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What’s happening: Dell Technologies is scheduled to report its fourth-quarter results after the closing bell on Thursday, February 27. Although the company is expected to report strong earnings, there are concerns that its guidance for the April quarter and beyond will be impacted by more than the coronavirus crisis.

What happened: Dell has topped quarterly earnings estimates every time it reported results over the past year. However, the fourth-quarter estimates have been lowered several times over the last three months, given the server market weakness and China-related concerns. Analysts expect the Round Rock, Texas-based tech giant to continue to feel the heat, with the coronavirus adding to its woes going ahead.

  • The consensus estimate for revenue stands at $23.92 billion, representing 0.3% year-on-year growth.
  • The earnings estimate is $2.00 per share, with 7.5% growth from the same quarter in the previous year.

Why it matters: The infrastructure behemoth has seen its China sales being hit by the US-China trade war. The company’s market share in the Asian country has also been contracting due to stiff competition from its Chinese rivals.

Dell has been reporting steep declines in its server and networking segment. In the face of strong competition from companies like Hewlett Packard Enterprise, Dell feels an urgent need to curtail the decline in server revenues to maintain its lead in the global server and storage market. Dell’s presence in the security market will also be impacted by its plans to sell RSA Security for $2.08 billion. VMware’s acquisition of security specialist Carbon Black last year could provide some relief to Dell’s stakeholders, as the company owns an 81% stake in VMware.

Dell had announced plans to launch a midrange storage portfolio. However, it has been more than a year since the announcement, and the company has recently indicated a further delay of the highly anticipated midrange storage system until Spring.

To add to its woes in China, Dell is now feeling the impact of the coronavirus epidemic. The IT sector has been hard hit by the virus and the company’s rivals have reported supply issues. Lenovo is facing delays in its business, Nvidia has projected a $100 million hit to its fiscal first-quarter revenue. Apple also indicated that it may not be able to meet its revenue outlook due to the coronavirus impact. The deadly virus has also resulted in a cancellation of Mobile World Congress 2020 in Barcelona.

On a positive note, Dell is likely to benefit from its strong position in the IT market, with higher customer spending on infrastructure providing upside. Healthy momentum at VMware is also expected to support Dell’s growth. The company’s PC segment has delivered growth for eight consecutive quarters, with the gaming business proving to be a major growth driver.

How the shares have performed so far: The stock, which IPOed in December 2018, debuted at $46. Shares climbed to around $70 in May, giving investors a whopping 52% return in just five months. The stock tumbled, however, following Dell’s first-quarter earnings. The stock has been hovering in the $48-$53 range so far this year.

What to watch: Investors will be keen to know how the company is being impacted by the coronavirus. Dell is also expected to provide details of the official launch of its midrange storage portfolio and related projections.

The Markets Today

     

Investors will be watching European markets today, amid rising coronavirus concerns. Some major economic releases from the country could provide support to the markets.​

Context: European markets closed mostly higher on Wednesday, after a highly volatile session. There is a high degree of uncertainty among investors, as they watch countries imposing trade and travel restrictions and businesses struggling with lower revenues from China and factory closures. There are heightened fears of the spread of the coronavirus beyond the Chinese borders to cause a severe downturn in global economic growth.

Details: For the first time, the number of COVID-19 cases outside China surpassed those inside the country. The Eurozone’s biggest affected area, Italy, reported that the virus had spread to the south, beyond the initial northern regions of the country. The number of coronavirus cases surged to 400 in Italy, representing a 25% rise over the previous day. There has been a rise in new cases across Europe, including Austria, Spain and Switzerland. France also announced its second death from the virus yesterday. The WHO reported that the virus, which has claimed more than 2,700 lives so far, is spreading faster outside China for the first time.

The European Stoxx 600 cut back some losses and closed mostly flat, with travel and leisure stocks being among the worst performing sectors. The index is down around 6% for the week. The UK 100 index gained 0.35%, while French 40 rose 0.09%. The German 30 index closed down 0.12%.

On the economic data front, France announced that its consumer confidence had remained stable in February, topping expectations.

Shares of ISS tumbled 15%, after the company issued weak guidance for 2020, while Biomerieux tanked around 7% following disappointing results for the full year. Groupe PSA shares gained about 5% after a revenue beat.

Why it matters: After a weak performance by European stocks in Tuesday’s session followed by some support during Wednesday’s trading, all eyes are on further economic data scheduled for release today. Strong readings are likely to provide some support to the markets.

What to watch: The Business Climate Indicator for the Eurozone is expected to fall to -0.28 in February, after having risen marginally to -0.23 in January. The consumer confidence indicator is likely to rise to -6.6 in February, versus a reading of -8.1 in the prior month. Analysts expect the economic sentiment indicator to remain unchanged at 102.8 in February. Preliminary estimates show that the services confidence indicator will rise to 11.2, while industry confidence will remain steady at -7.3.

Other Markets: European indices closed mostly higher on Wednesday, with the UK 100 and French 40 up 0.35% and 0.09%, respectively, and the German 30 closing down 0.12%.

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What else to watch today

     

UK’s nationwide housing prices, Spain’s inflation rate and industry confidence indicator, Italy's manufacturing confidence index and consumer confidence index, South Africa’s producer prices, Indonesia’s residential property price index, Mexico’s unemployment rate, Canada's current account as well as the US GDP growth rate, durable goods orders, jobless claims, pending home sales, Kansas City Fed's manufacturing production index and EIA’s natural gas report.