As Demand For PCs Recovers, Goldman Sachs Says This Stock Could Jump 15%

Despite the challenges that Dell faces in the near term, Goldman Sachs recommends that investors hold on to their Dell investments.

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According to analyst Michael Ng, Dell has been initiated into coverage with a buy rating and a price target of $43 and he expects that price to increase 15.5% from where it closed Friday to where it is expected to close next year.

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There has been a weakening in computer demand trends in the past six quarters, which is creating headwinds for the economy, but he says those ought to subside soon, as the typical cycle requires between four and six quarters to reach a bottom. He said the weakening in computer demand generally lasts between four and six quarters, so we should see improvements quite soon.

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Despite recognizing DELL's business is highly cyclical in nature, we believe the company's share price reflects the company's strong cyclicality with its 7X NTM P/E and a long-term target of converting at least 100% of the company's free cash flow into net income in order to fund shareholder capital returns in the future, Ng stated in a note to clients on Monday.

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It was also suggested by Ng that the company would be benefited by the eventual change-over cycle for the computers purchased during the pandemic.

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Ng said that the company's infrastructure and client solutions groups are also expecting revenues to decline from 2023 to 2024 in a mid-teen percent decline due to the challenging environment. Among the early signs that storage demand is waning, especially among small and medium-sized businesses, the company reports slides in enterprise spend as well as signs of a weakening of enterprise spend.

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There is no doubt that Dell's servers and storage should be able to ensure that it maintains or increases its share value in the near future because of the prospect of growth and demand returning. Despite the fact that the infrastructure solutions group is forecast to see a drop in revenue of 14% in the fiscal year 2024, the group is expected to see a growth of 4% in the fiscal year 2025 and thereafter. According to him, the revenue of the Client Solutions Group is also expected to fall 14% in fiscal 2024, followed by a growth of 3% in fiscal 2025 and a reduction of 1% in fiscal 2026.

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Moreover, Ng said that the company's long-term financial model looks very healthy, with revenue growth of between 3% and 4% and earnings per share growth of at least 6%, over the next few years. Additionally, Dell should see the conversion of at least 100% of its net income to free cash flow over the next few years, with between 40% and 60% of that free cash flow being returned to shareholders in the next few years.

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According to Ng, the stock is attractive due to its price-to-earnings ratio which is expected to be 7 over the next 12 months.