Dell’s Plan Comes Together
Forty years ago, the television series The A-Team premiered on NBC. Although the program lasted only four seasons, the favorite catchphrase of the team’s cigar chomping leader lives on: “I love it when a plan comes together.”
I thought of that expression when computer PC maker Dell Technologies (NYSE: DELL) jumped 21% on September 1. The day before, Dell released its fiscal 2024 Q2 results that caught Wall Street off guard.
It wasn’t what happened during the second quarter that got Wall Street’s attention. On a year-over-year basis, its total revenue fell 13%. The company’s diluted EPS (earnings per share) dropped by 7%.
Although those numbers were worse than a year ago, they were better than feared. Even still, at this point you may be wondering why the stock didn’t drop instead of rising.
In a word (actually, two words), it all comes down to artificial intelligence (AI). Six weeks ago, Dell introduced a new suite of products using AI to help companies improve performance.
There’s nothing particularly noteworthy about that. Just about every tech company in the world is jumping on the AI bandwagon.
However, what makes this development notable is that Dell’s partner in this venture is NVIDIA (NSDQ: NVDA). Yes, that’s the same NVIDIA that gained 400% during the past year.
Oddly, that announcement barely moved Dell’s share price at all. The following day, Dell’s share price increased by less than 1%.
That’s because Dell did not attach any revenue forecasts to that announcement. All it said is that these products are on the way.
Not Blowing Smoke
That all changed two weeks ago. That day, Dell raised its full-year guidance for revenue and EPS due to its AI business. Now, the company expects sales of about $90 billion and EPS of $6.30.
More importantly, Wall Street woke up to the fact that Dell wasn’t just blowing smoke when it said it was going to aggressively pursue the AI market. And with NVIDIA as a partner, the sky’s the limit.
So, what does all of that have to do with my flashback to The A-Team?
Fifteen months ago, I recommended Dell to readers of my PF Pro trading service. At that time, Dell was trading around $45. A few months earlier it was closer to $60. But then the Fed started raising interest rates and tech stocks took a bath.
I noted then, “Despite posting record results during the most recent quarter, DELL has gained no ground during the past year and is currently valued at less than seven times forward earnings.” As a result, my PF Pro stock screener flagged Dell as being grossly oversold and ripe for a rebound.
That rebound took longer to materialize than I expected. As recently as three months ago, Dell was no higher than when I recommended it last year.
To be clear, I never doubted that Dell would eventually live up to my expectations. However, I was beginning to wonder how long it might be until my plan came together.
Especially since I recommended buying a call option on Dell that expires this January. A call option increases in value when the price of the underlying security goes up.
Leap of Faith
Fortunately, Dell made its big move now instead of four months from now. As a result, my call option shot up in value.
Two weeks ago, that trade could be closed out for a gain of 177%. If you had bought the stock instead of the option on the day I made that recommendation, the profit would be 50%.
That’s the beauty of using options. They magnify the result if you are right. However, they also magnify the result when you are wrong.
If Dell waited until next year to announce its partnership with NVIDIA, my call option may have expired worthless. In that case, my loss would have been 100%. But if I owned shares of stock, I could keep waiting until Dell finally made its move.
That is why I use LEAPS (long-term equity anticipation securities) for my PF Pro trades. LEAPS are call or put options that do not expire for at least one year from when they are purchased.
When I opened this position, I chose a call option that had nineteen months to go until expiration. I felt confident that my analysis would be proven correct within that timeframe.
As was often the case with The A-Team, we cut it close this time. But in the end, we got what we wanted. I love it when a plan comes together.
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