Key Takeaways
- CDW shares jumped 14% after third-quarter revenue rose 17.7% and non-GAAP EPS of $3.26 beat the $2.98 consensus.
- Gross margin fell to 20.5% from 21.9% on lower-margin hardware, but gross profit still rose 10.3%.
- That trade is worth it: the non-GAAP operating margin held at 9.2%, and TD Synnex shows the same pattern.
- Insight reports this week, a test of how far CDW’s demand reaches.
CDW (CDW) soared 14% today after third-quarter revenue jumped 17.7% to $6.75 billion, well ahead of the $6.19 billion analysts expected. Evercore ISI kept its Outperform rating, raised its price target to $185 from $160, and called the September quarter “an encouraging step forward.”
Elsewhere in the channel, TD Synnex (SNX) is up 1% and Insight Enterprises (NSIT) is up 4%.
Hardware did the heavy lifting
Storage, servers and notebooks led the growth, and sales to Financial Services customers jumped 73.2%. CDW also raised its full-year outlook on the call: it now expects non-GAAP EPS to grow at a low double-digit rate, up from high single digits. Going in, analysts expected about 10%:
With $8.44 already earned through nine months, I’d expect those estimates to rise.
TIKR tracks 10 analysts on CDW. How many say “Buy”?
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I’ll take this trade
The catch is the margin, already at a two-year low of 20.1% in the second quarter:
It was 20.5% in the third quarter, against 21.9% a year earlier. But gross profit grew 10.3%, and the non-GAAP operating margin held at 9.2%. As CEO Chris Leahy put it on the call, the hardware push “delivered significant profit dollars today and opportunities for solutions and services over time.”
TD Synnex shows the same trade. In its quarter to Aug. 31, revenue rose 37.7% and gross margin fell 61 basis points, yet its non-GAAP operating margin widened to 3.42% from 3.03%. Insight’s second-quarter gross margin rose instead, to 21.7%, and its report this week will show whether hardware is crowding it too.
Dell Technologies (DELL) is down 9% on the midterm election results, though CDW’s quarter reads well for it. CDW’s results say business customers kept buying servers, storage and PCs through September, the lines behind Dell’s 58% revenue growth in its quarter to July 31. Dell reports on Nov. 24.
Still below its usual multiple
The risk is cash: inventory doubled from a year earlier, and nine-month free cash flow fell to $538 million from $692 million.
Even so, CDW traded at 13x forward earnings at yesterday’s close, well below its five-year average of 18x:
At today’s price, it’s about 15x. Bottom line: CDW is turning bigger AI deals into more profit, and the market still isn’t paying a premium for it. Of course, the next few quarters will tell us whether those deals bring the services work Leahy is counting on.
So what is CDW stock actually worth?
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Disclaimer:
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