As investors fled high-flying tech stocks this year, they turned to old-school companies such as computer maker Dell Technologies Inc, offering growth at a much cheaper price. Now that trade is running out of steam. Dell has slumped 10.2% the past month, worse than the tech-heavy Nasdaq 100 Index. The market is pricing in the growing reality that corporations are pulling back on hardware purchases given that a recession may be looming. The thesis got support Thursday from Dell co-chief operating officer Jeff Clarke, who said the company is “in an increasingly challenging environment.”
Why Does it Matter
At 6 times estimated earnings for the next year, shares of Dell are still cheap – every component of the Nasdaq 100 is more expensive – yet analysts are now busily trimming those estimates. The weakness has spread to other hardware companies as well. HP Inc. and Hewlett Packard Enterprise Co., both of which report results after the market close on Tuesday, plunged on Friday and have underperformed tech over the past month, though by smaller margins than Dell.
Wayne Kaufman, chief market analyst at Phoenix Financial, said a discounted price isn’t enough to make hardware stocks attractive at the moment. “There’s no sign that fundamentals have bottomed, as hardware companies continue to work through inventory and demand issues, which suggests that investors should avoid them for the time being,” he said. The slowdown in business is all the more notable because the industry has just come through a period of robust demand related to the pandemic. Analysts predict that revenue will decline in each of the next two quarters, versus 17% growth in the last fiscal year.