A Winner When Tech Spending Turns

09/15/2009 12:30 pm EST

Focus: STOCKS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Joshua Levine of ChangeWave Investing say that Dell should profit big from a revival in technology spending and the launch of a new operating system.

We're expecting at least 2.5% GDP growth in [the third quarter, and] the outlook for corporate spending continues to improve, albeit slowly, as we head into 2010.

Last quarter we saw that corporate [information technology] spending was rapidly stabilizing, and in our latest [ChangeWave] survey, we see no significant change for better or worse.

When we look ahead to the first half of 2010, we see some more positive signs. Twenty-four percent thought their company's first-half 2010 budget will be greater than the second half of 2009—a four-point improvement since the previous survey. Only 19% thought their company's IT budget will be less than the second half of 2009—also four points better. Importantly, this was the most optimistic longer-term outlook we've seen in two years.

As for vendors, Microsoft (Nasdaq: MSFT) and Dell (Nasdaq: DELL) showed signs of momentum—possibly due to the combination of the impending release of Windows 7 and a potentially big push to replace enterprise PCs, many of which are at least four years old.

Following Dell's upbeat results [recently], we've moved the company to the top of our watch list as we anxiously await results of our current corporate demand quarterly survey—as well as the upcoming corporate PC and server purchasing report.

Dell is clearly making headway as it attempts to finally turn the corner, and it will certainly enjoy a bigger boost if corporate IT spending ramps up in coming quarters. PC demand was unchanged in our latest IT spending survey, something that was likely attributable to companies delaying computer purchases until Windows 7 OS is available. And, our latest survey of Windows 7 beta testers found high satisfaction ratings and strong levels of acceptance—things that bode well for Dell.

We also [have] pointed out that Dell showed signs of momentum going forward, due to a potentially big push to replace enterprise PCs—many of which are at least four years old.

Dell is clearly making headway as it attempts to finally turn the corner, and it will certainly enjoy a bigger boost if corporate IT spending ramps up in coming quarters.

There's nothing fancy about what we're doing here. We're just hitching our wagon to the PC manufacturer best positioned to benefit from the convergence of two major buying waves.

We recommend that you begin accumulating DELL with a Buy Under of $16.50 and buy aggressively below $14.50. (It closed above $16 Monday—Editor.) Our 12-month target is $25 to $28.

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