Shares of Dell Inc fell more than 7 percent in premarket trading on Wednesday, after the world's No.3 personal computer maker forecast weak sales for the current quarter.
Dell has slim prospects for additional margin expansion in the near term, Citigroup said and downgraded the stock to "neutral" from "buy."
The company may see more volatility in operating margins and earnings going forward, Citigroup said and cut its price target to $19 from $20.
Dell said on Tuesday sales would be down 7 percent this quarter from the previous quarter, when it posted revenue of $16 billion.
Citigroup said while Dell was able to offset virtually all HDD cost increases with product price increases, it did not consider the impact of HDD supply constraints on its ability to optimize product mix during the quarter.
"While the phone write-downs are non-recurring, we do not expect HDD constraints to improve until 2FQ and fear that other components will begin to rise as HDD supply comes back into balance," Citigroup analysts wrote in a note.
BMO Capital Markets said margins in the PC business may require the onset of Windows 8, and cut its price target on the stock to $20 from $21.50.
Microsoft's latest Window's version, due later this year, will be offered on Dell's personal computers, laptops and tablets.
RBC Capital and Jefferies see headwinds from the PC business offsetting margins from Dell's profitable server business.
Jefferies analyst Peter Misek said there is mounting pressure on Dell to do an acquisition in software to salvage its revenues from the sector, and sees a deal in the $100 million to $1 billion range, with Axway Software as a possible target.
Jefferies raised its price target on Dell stock to $17 from $15, while RBC raised its price target to $18 from $17.
Dell shares, which touched a year high of $18.36 on Tuesday, fell 7.5 percent to $16.85 before the bell on Wednesday.
(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Gopakumar Warrier)