Morgan Stanley is adopting a bearish stance on Dell . The bank double downgraded shares of the computer maker to underweight from overweight. Analyst Erik Woodring also slashed his price target to $110 from $144, which implies downside of 18% from Friday’s close. Woodring believes that margin pressures could compress Dell’s valuation from here. He highlighted that Dell is one of the hardware original equipment manufacturers that is most exposed to rising costs within the DRAM and NAND memory businesses, which should weigh on margins over the next 12-to-18 months. DELL YTD mountain DELL YTD chart “This is important as history tells us that companies facing margin headwinds underperform peers with similar growth rates, but stable-to-expanding margins,” the analyst added. “Our historical analysis suggests a strong negative correlation between rising DRAM/ NAND prices and DELL’s gross margins, especially when we consider that memory makes up 25-70% of the [bill of materials] for all three of DELL’s key product segments.” The analyst referenced the memory cycle between 2016 and 2018, noting that Dell’s gross margin contracted by 95 basis points to 170 basis points in the nine months after memory prices started to rise. Woodring added that the “severity” of this cycle implies that this historical pattern should remain intact this cycle. Shares of Dell have added 16% this year but were down 6% after the downgrade. Despite the downgrade, most analysts are bullish on Dell. Of the 26 who cover it, 21 rate it a buy or strong buy, according to LSEG.
