Dell Hikes Estimates for Next Four Years on Strong AI Demand

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1:10Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. Dell, let's dig a little deeper into this guidance that the company offered. I'd say it's more than guidance, isn't it? Yeah, it's kind of a, I don't know, kind of a long-term vision a little bit of where the business is going. Exactly. And, you know, in the tech industry, to be able to kind of project out that far is pretty notable.

1:47Let's bring in Ed Ludlow, who is our B-Tech co-anchor based in San Francisco. So, and Ed, one thing that I noticed about Dell is that this is another legacy tech company that's getting a big boost here from the whole AI play. And Dell is doing that through its AI servers, but it still has another part of its conventional business that is holding up at least. Yeah, exactly. I mean, you guys make really good points about is this guidance or more? It's kind of like a reset on Dell's position in the AI market. It's another example of like, well, if we're all sort of very hyped up about data center builds out and NVIDIA is getting all of this love and we're very focused on energy, then why do we not talk more about Dell?

2:33If you build a data center, whether that is hyperscale or it's an on-premises smaller facility that any given sort of software company operates themselves, Dell is likely to play a part. You know, they assemble servers. That needs to happen. You don't just sort of put all the chips and a pile on the floor. And so it's taken a while for investors to kind of give Dell credit for that. A part of the reason being that because this build out of infrastructure is so fast, Dell's margins on the AI server business have really suffered because you have to spend money to move quickly. And a big part of the guidance they gave us through the fiscal 30 is that that profit picture for the AI server business is really going to improve.

3:14And as you say, the core business, which is kind of PC as well, is supporting them do that in the interim. Dell stock is up two and a half percent today. It's hit a 52 week high today. It's up 30 percent year to date. It's not an all time high. That was back in 2024. But it's certainly going in the right direction here. So, Ed, how does a company position itself as an AI player? Are they playing that up? Are they saying, hey, we're in a good position? position? How are they kind of positioning their company as a story? So right now in New York City, all of the executives are on a stage talking about bigging themselves up.

3:54And the main argument that they're making is that on-premises part I was talking about. So in the future, Dell argues, 85 % of all enterprises are going to have some form of on-prem footprint themselves. And Dell, which has a rich history of selling to businesses of small and large and the public sector is best positioned to participate in that. And the idea, right, is that this all started with the hyperscalers, the cloud computing companies and their capital expenditures. But the ripple effect is that we're now seeing smaller companies in software in particular, justified budgets to spend on their own technology because they see a return on the other side, literally revenues driven by AI.

4:44So that's what Dell's argument is here. You know, you guys, the story is that through 2030, they've basically almost doubled their forecast for the top and bottom line, five to seven to nine percent top line growth and adjusted EPS growth of around 15 percent. And a big part of that story is just more people doing business with them. So one thing that stuck out to me, Ed, is the comments from the COO, Jeff Clark, saying we were all wrong about how big we thought the AI market was two years ago. And it's nothing but bigger. Does Dell have a reputation as being conservative when kind of guiding along its vision?

5:21Or is this a company that usually nails it in terms of its forecasts? You know, like I don't know conservative is fair. I mean, like you have to assess the business that they're doing in the here and now and the pipeline of business that they say has to come. And so like Dina Bass, our colleague, did a really good job of explaining that in the quarter. There is the sales that they've had committed to them. They booked$5.6 billion of new AI server business in the quarter. They shipped$8.2 billion worth of business in the quarter. So like actual sales. and then in the future they have a backlog of 12 billion it's not that new an idea that there's a pipeline of business it takes time to assemble servers you know ship them out onto location the thing that that they need to justify is like what's the value add that they do so i told you earlier in this segment they say margins will improve the thing is that all they're really doing is assembling something yeah they're not sort of contributing some amazing technology That's what NVIDIA is doing.

6:24Stay with us. More from Bloomberg Intelligence coming up after this.

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7:46Lovin' stocks up. That's despite the fact that the App Lovin' this company is being probed by the SEC over its data collection practices. I don't know how to play that. I know the stock is the best performing NASDAQ member in the second half of this year up 79%. Okay, I have to start with the pro we're going to go to. Nathan Nadeau, Bloomberg Intelligence Technology Research Analyst. Nathan, I don't know a lot about this company. Tell our viewers and our listeners about app loving number one and number two what is this what's the sec interested in so essentially app loving is in the business of helping advertisers or helping rather owners of apps primary apps on the ios devices on android helping app publishers sell ad space inside of their apps to potential advertisers meaning they help help uh app owners ever time you know make money off of selling ad space to advertisers, whether that be brands or another game potentially.

8:47And AppLevine typically charges a fee in mediating that transactions. So going on to the SEC prop or potential SEC prop rather, because nothing is confirmed as of now, SEC allegedly is looking into its data collection practices. And, you know, there was a couple of links made to short seller reports that surfaced back in February. And that was also around the company business practices, particularly in its inflation of app installation numbers. And actually, you know, in addition to this SEC probe or potential SEC probe rather, there was a class action lawsuit filed in March. And it could advance the trial according to our litigation analyst, Matthew based in Washington, DC.

9:38And so that is another that's actually could be a bigger fish to fry for Apple in in addition to, you know, alongside its SEC probe from my point of view. Okay, so there's negative catalysts for sure for this company. Yet, as Paul points out, the stock is rising today. Is this because Apple is a meme stock? Well, I don't know about Apple being a meme stock, but I mean, it certainly haven't made up all of the losses that we saw yesterday. The stock was down 14-15 % in one day, and I think you have made up partially that in today's gains. Because the SEC probe is not confirmed, and typically the biggest risk from this potential SEC probe is a penalty.

10:21If we look at SEC's published report for its fiscal 2024, the heaviest fine was$100 million. Meanwhile, Eplevin at the moment is pumping out$2 billion in free cash flow every year. So I think the SEC risk alone, it wouldn't make much of a financial impact to Ablovin per se. But the bigger risk that we're watching here is definitely that potential class action lawsuit because our analyst Matthew estimate that that could be$750 million in fine if that goes to trials and Ablovin couldn't win a motion to dismiss in the next couple of months. So, yeah. Nathan, has a company responded at all or talked about this issue?

11:08The only allegations that a company denied was the allegations from the short sellers back in February. The company has not outwardly denied the allegations or the potential allegations rather from this latest SEC probe. So that's where we stand right now. Stay with us. More from Bloomberg Intelligence coming up after this.

11:36You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right. I'm thinking Constellation Brands. you thinking Corona beer, Modelo beer, Pacifico beer, they've got some wines. Stock's down 35 % year to date. And I'm thinking it has to do with the crackdown on immigration. Tariffs as well. And those brands. So I'm thinking of all that kind of just kind of weighing down on the stock. Let's check in with Ken Shea.

12:14He's the senior consumer products analyst for Bloomberg Intelligence. Ken, talk to us about Constellation Brands. What's weighing on the stock? What's the company doing about it? Yeah, hi, Paul and Scarlett. Well, you mentioned two of the factors right there. It's definitely a slow beer market. Tariffs are playing a role. And also some of the crackdown, you know, the ice has had in inner communities hurting the Hispanic community and their socialization trends. All these things have been a factor for the last couple quarters. Today, the company said that their beer volumes were not quite as poor as a lot of street analysts expected today.

12:55But the pressures are still on. And they're very real for this company. And that's because their suite of products, as you mentioned, Corona, Modelo, these command high price points about twice the level of a popular beer. So in times where consumers are pulling back, a little cautious about expenditures. You've got to remember, you've had high inflationary pricing in this category for the last few years. These brands aren't doing so well right now. And then compounding that with some of the factors that I mentioned and some longer-term issues like cannabis substitution, things we talked about, GLP-1 user not drinking as much, moderation among Gen Z.

13:35All these things are weighing off a company right now. Yeah, I'm super interested in what you said about the last part, like the structural changes in consumer taste, especially from Gen Z, younger people overall. Beer is just not where people want to be spending their money necessarily. That seems to be the case. You know, it's been around a long time. It's a$115 billion market that is growing very slowly. It's essentially flat. In fact, volumes are expected to be down low single digit this year. So clearly it's a very mature category. And what we've seen over the last few years is consumers just want different tastes.

14:11You know, you have a proliferation of the rated drink cocktails, you know, like Truly and White Claws and more sophisticated, you know, margaritas in a can and so on. That's where a lot of the consumer who wants taste experimentation are going. And then you have other more mundane factors like just, you know, calorie, more conscious, conscientious calorie counts. And all these things are just weighing on this very, very mature industry. So somebody like Constellation Brands, do they go out and look to maybe buy some of these brands or verticals that within the spirits business may be growing? Well, they've had kind of a mixed history of M &A over the last few years.

14:53I'll be kind and say it that way. Not really. They're downsizing their wine and spirits segment and try to shift it to more of a high-end mix, which I think they're having success with. But what that does is it makes their beer business even that much more important. It's now about 85 % of their sales. So as beer goes, I mean, the company has really good brands and a lot of brand loyalty there. But again, there's not a lot of wiggle room there. So with beer becoming less popular, and you mentioned other big trends like Ozempic weight loss drugs and greater cannabis use, What is Constellation doing about non-alcoholic beverages?

15:38So they've rolled out a non-alcoholic Corona brand. They've come out a couple years ago, they came out with a low-calorie brand called Modelo Oro. Corona, no alcohol, I think I mentioned. So those two brands, while they're relatively small, they see a lot of opportunity that's on trend with what you said. So, you know, they're doing that. They're also modifying some of their portfolio for more taste. There's consumers that want a lot of taste. They're coming out with, you know, a fruity cerveza. And so they're doing as much as they can to stay on trend with consumers. I love myself a grapefruit beer.

16:23Yeah, there's a German grapefruit beer that I really like. Yeah, tastes good. So talk to us about this legal cannabis and obesity drugs. and the impact that's having on kind of the beer business, the spirits business overall. Ken, is that something that a lot of your companies are calling out? Yes. As a matter of fact, Paul, yesterday we came out with our BI, came out with our fourth annual consumer survey on beverage preferences. And again, we see that consumers are substituting cannabis for alcohol. Of consumers that do partake in cannabis, now more than half have substituted for alcohol. at least once a week.

17:04And that's up from 46 % last year. So that's a trend that just keeps moving. Now you're seeing a lot of these cannabis companies coming out with hemp THC products, beverages that are sold in mainstream liquor stores. You know, traditional cannabis, legal cannabis sold in dispensaries, it was not really a big hit. But now that some of these federally legal hemp-based THC products, beverages, are sold in liquor stores right next to the beer isle in about half the states of the country, that's really chipping away also at beer consumption. A final question to you, Ken. What about return of cash to shareholders?

17:42I'm looking at the dividend yield about 2.9 percent, if you're being generous. Is Constellation Brand still able to make good on its dividends, continue buying back its shares? Yeah, that's an important point, Scarlett. Yes, they can. Despite the pressure on sales, believe it or not, the operating margins that Constellation generates are best in class. They're about twice that of other alcohol and beverage companies in general. So they have strong cash flows. As a matter of fact, they're winding down construction of a brewery right now over the next couple of years. You're going to see free cash flow likely rising.

18:18So it's high and rising, and that's enabling them to continue to meet their commitments to share buybacks and dividends. Stay with us. More from Bloomberg Intelligence coming up after this.

18:33You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's switch gears and take a look at some of the hardware companies, or I should say software companies. Once upon a time, it was hardware. And I'm talking about IBM. It's a legacy tech company, and it is the latest legacy tech company to partner up with an AI startup. Anurag Rana is tech analyst here at Bloomberg Intelligence. Anurag, we hear this fancy announcement about IBM inking a partnership with Anthropic to integrate this clod family of large language models into certain IBM software.

19:17What I noticed is that there's no dollar amount mentioned at all. So how do you evaluate this partnership versus other tie-ups? See, when you come to a company like IBM, I think they have done a very good job of being open and partnering with other vendors. I think the acquisition of Red Hat was the first such example a few years ago. And frankly speaking, the company has turned around quite a bit. Now it's more of a software company than it is a service or a hardware company. So when you look at today's announcements, IBM still has a lot of footprint in legacy companies and their internal infrastructure, whether that's a regulated entity, whether that's an on-premise software, what they're basically saying is, for these companies who want to add more AI capabilities into their infrastructure, we're going to use one of the best models that's out there, and that's Anthropic.

20:06They're not just solely dependent on IBM's own internal models, but we see more and more of that happening, that companies like IBM and other services companies will go out and partner with, you know, Anthropic, with OpenAI, with Gemini, and give more enterprise capabilities to vendors or to companies, basically. How does Anthropic differ from OpenAI, if at all? That's a very good question, Paul. And right now, what we are seeing is Anthropic is pushing more and more stuff on the corporate side or the enterprise side. On OpenAI side, you know, their core business sales still chat GPT, which is the app, and that's more of a consumer app right now.

20:44And the question is, you know, which one of the models will somebody use? Whether if you are, let's say, a JPMorgan or a Citicorp, you know, would you be going to be using one of their models or an open source model? I think they're going to be using all of the models. What Anthropic relationship with IBM does, it actually helps them to spread the word out across their entire customer base. So, if you are trying to get more coding done, for example, in an IT department and you have all the legacy products that there, now you can use an AI model from Anthropic rather than using whatever tools you had before.

21:18Okay. So it makes sense why Anthropic is a good fit for IBM or how it's going to incorporate Anthropic into its software. But what does IBM specifically offer Anthropic? What access does IBM have that Anthropic wants and needs? That's another excellent question. And in this case, you're looking at IBM's entire customer base. IBM has a very large services business called IBM Consulting. These consultants will go out and sell Anthropic software into the enterprises and say, hey, bank, let me help you to automate this particular process and you can use it with this software. It drives their consulting business and it also helps out their software business, which is fairly popular right now.

22:00IBM hitting all time high here today, Anurag. this stock has found a new life, hasn't it? Yeah, absolutely. And this is something that we've been saying it for almost five years now. You know, the acquisition of Red Hat completely changed it. You know, if you go back and look at, you know, some of the comments we've made on TV about IBM prior to Red Hat, it was a very closed company. It only wanted to sell their own products to people and was not very keen on embracing, you know, what I would say is open source. With the acquisition of Red Hat and the company saying, you know what, Red Hat can work with any cloud provider.

22:36I think that was the biggest difference to me was it allowed Red Hat to work with companies, but based on Amazon Web Services or Microsoft. So they were not just pushing their own cloud products. And I think that really made a difference. Their software business has been doing so well comparatively to the rest of the world. And I think that's where you see the market validation that this is the right strategy for them. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app.

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