"A big thrust to our call is that we believe that Dell is almost there, in terms of completing its revenue pruning," he writes in a research note. "In our view, the positive inflection point could occur in the next 3-6 months, setting the stage for the revenue growth trend-line to point back to 4-5%. When layering in our assumption that gross margin improvements stick, we believe Dell’s long-term earnings growth could approach 10%. These factors and others stand to favorably lift Dell’s valuation multiples, which the model can grow into."
The analyst offers five reason for his bullish stance on the stock:
- As noted, "revenue pruning" could end soon, providing better growth going forward than the Street suspects.
- The company can sustain its gross margin profile, while the Street expects gradual erosion.
- Dell can compete in storage, which offers "above-peer growth potential."
- M&A strategy at Dell is likely to "remain measured."
- Ultrabooks and arrival of Windows 8 could give a boost to PC sales later in the year.
"We might be late, but we see plenty of upside," the analyst writes. "Dell’s stock is up 18.9% year-to-date, vs. the S&P 500’s increase of 5.3%. We acknowledge the stock’s big move. While late, we think there is plenty of upside from current levels. If Dell can string together a few quarters where the revenue growth cadence points to long-term growth of 4-5% and gross margin holds up, then we expect the valuation multiples to rerate higher."
DELL is up 36 cents, or 2.1%, to $17.76.
