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Dell Shares Upgraded After Second-Quarter Earnings Beat

Dell beat earnings estimates and analysts see possibilities in the tech giant's potential spinoff of VMware.
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Dell Technologies  (DELL) - Get Dell Technologies Inc Class C Report shares were upgraded by securities analysts amid the computer company's second-quarter earnings results and the prospect that it might spin off enterprise cloud company VMware  (VMW) - Get VMware, Inc. Class A Report.

Shares of the Round Rock, Texas, company at last check were 6.6% higher at $66.55.

Dell reported net income of $1.1 billion, or $1.37 a share, compared with $4.2 billion, or $4.47, in the year-earlier period. Adjusted earnings came to $1.92 a share, beating FactSet's consensus analyst estimate of $1.38 a share.

Revenue totaled $22.7 billion, down from $23.4 billion a year earlier but ahead of FactSet's call for $22.48 billion.

Consumer sales rose 18% to $3.2 billion, with double-digit growth across consumer notebooks and gaming systems.

“In Q2, we saw strength in the government sector and in education, with orders up 16% and 24%, respectively, as parents, teachers and school districts prepare for a new frontier in virtual learning," Jeff Clarke, vice chairman and chief operating officer, said in a statement. 

The executive referred to the impact of the coronavirus pandemic.

VMware revenue rose 10% to $2.9 billion. Dell owns an 81% a stake in VMware through the $67 billion buyout of EMC in 2016. Dell has said it is "exploring" a spinoff of VMware.

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RBC Capital Markets analyst Robert Muller upgraded Dell to outperform from sector perform, while raising his price target to $80 a share from $48. 

The analyst noted that "with a VMware spinoff on the table, we see a clear path by which Dell can unlock the value of its stake."

Katy Huberty, an analyst with Morgan Stanley, said the results beat expectations but added that the company “is taking a cautious view on the second half with guidance for below-seasonal revenue growth over the next two quarters.”

Huberty, who has an overweight rating on Dell with a price target of $70, said the stock remains “undervalued in light of accelerating share gains in core markets.”

A VMware spinoff, she said, “provides an opportunity to unlock sum-of-the-parts value, simplify ownership structure, and speed up de-levering.”

Citi analyst Jim Suva, who has a buy rating and $75 price target on the company, said Dell's results “demonstrate strong execution.” 

Suva added that Dell trades below fair value, “hereby driving a strategic review and preparation to a potential tax-free spinout of VMW," which he suggested will likely happen in the second half of next year.

The infrastructure solutions group posted $8.2 billion in revenue, with customers continuing to direct more spending toward remote work and business continuity.