Dell Technologies (DELL -1.64%) stock tumbled 11% through 10:05 a.m. ET Wednesday after the company reported mixed earnings last night.
Heading into the report, analysts forecast Dell would earn $2.06 per share in Q3. Dell beat that number, reporting pro forma profits of $2.15. However, the company's quarterly revenue fell short of expectations at $24.4 billion, versus Wall Street's expected $24.7 billion.
Dell Q3 earnings
Sales still grew 10% year over year, however, led by the company's infrastructure solutions group (i.e., server farms), which showed tremendous 34% sales growth. Client solutions, however (i.e., PCs and similar devices), suffered a 1% decline in sales.
Earnings growth was even better. Non-GAAP (generally accepted accounting principles) adjusted profits grew 14%, and GAAP profits grew 16%, but the GAAP number remains far smaller -- only $1.58 per share -- a 27% difference, suggesting Dell's not really as profitable as the "earnings beat" makes it look.
Is Dell stock a buy?
As demonstrated by the divergence in growth rates between servers and PCs, Dell's placing a big bet on the continued popularity of artificial intelligence (AI) functions to drive its growth. COO Jeff Clarke said in the earnings release, "AI is a robust opportunity for us, with no signs of slowing down." And "interest in our [AI products] is at an all-time high, driving record AI server orders demand of $3.6 billion in Q3 and a pipeline that grew more than 50%, with growth across all customer types."
So why aren't investors impressed? The fact that sales came in just a bit lighter than expected is probably one reason. Valuation may be another.
Priced at 25 times earnings today, Dell stock is actually cheaper than the average S&P 500 (^GSPC -1.11%) stock, which costs closer to 31 times earnings. That makes Dell stock look like a relative bargain, but with profits only growing in the mid-teens, the stock still sells for a PEG ratio of at least 1.5, which isn't objectively cheap.
I continue to be cautious on Dell stock.
