Dell Upgraded to Overweight by Wells Fargo, Target Price 30% Higher

Wells Fargo has upgraded Dell Technologies (DELL.US) to an "overweight" rating, setting a target price of $150, which is 30% higher than the current stock price. This upgrade comes in response to recent reports that the U.S. federal government has been in contact with 10 technology suppliers to explore cost-cutting opportunities, which initially led to a decline in Dell's stock price. Wells Fargo believes that the concerns surrounding Dell's exposure to these risks have been overstated.

According to industry reports, Dell's total revenue from major federal contracts in 2024 is expected to be approximately $3.04 billion, with 56% from defense contracts and 44% from civilian contracts. This represents a 15% increase from 2022's $1.82 billion. Wells Fargo specifically notes that while Dell operates in various sectors, the personal computer business is most likely to face spending cuts under the U.S. General Services Administration's (GSA) cost-reduction initiatives. The bank anticipates that server spending will remain relatively stable and could even benefit from government modernization efforts. Additionally, the defense business is unlikely to be significantly impacted.

Wells Fargo's analysis suggests that Dell's exposure to federal government-related personal computer business risks is estimated to be around $3 billion. These estimates are rough, as Dell engages in federal government-related business through numerous business segments. The bank's "overweight" rating for Dell reflects a positive outlook on the company's deleveraging efforts and its shift towards capital return initiatives, including share buybacks and dividends. The bank also highlights Dell's ability to leverage its supply chain economies of scale. Given Dell's diverse investment portfolio and deep integration of software and hardware, its long-term risk/return profile is considered attractive.