CDW, a major technology products and services reseller, reported better-than-expected second-quarter results. But instead of celebrating the beat, investors focused on one softer metric: gross margin. The stock came under pressure as the market worried about the company's profitability outlook.
Morgan Stanley, however, thinks the selloff is overdone. In a note to clients, the bank said the market is overreacting to the gross margin softness and pointed out that CDW shares are trading at roughly 11.5 times its 2027 earnings per share estimate. That valuation, the bank argues, looks attractive for a company with CDW's scale and cash flow generation.
What happened in the quarter?
CDW's second-quarter results topped analyst expectations on the top and bottom lines, driven by solid demand for its IT solutions and services. The company benefits from businesses and public sector organizations upgrading their technology infrastructure, a trend that has remained resilient even as broader economic growth slows.
However, gross margin—the percentage of revenue left after covering the direct costs of goods sold—came in softer than some investors had hoped. Gross margin is a key profitability metric for resellers like CDW, because it reflects how much pricing power the company has and how efficiently it manages its supply chain. A dip in that figure can raise concerns about competition, product mix, or pricing pressure.
In CDW's case, the margin dip may reflect a shift toward lower-margin hardware sales or increased competition in certain product categories. But Morgan Stanley believes the market is reading too much into the single quarter's number, especially given the company's long-term earnings growth prospects.
Why the market's reaction may be overblown
Investors often punish stocks when a key metric misses, even if the overall quarter was strong. That's especially true for companies like CDW, where margins are closely watched as a sign of competitive health. But analysts at Morgan Stanley argue that the current valuation already accounts for the margin pressure and then some.
Trading at about 11.5 times expected 2027 earnings, CDW's stock is priced at a discount to many of its peers in the IT services and distribution space. For context, the broader S&P 500 trades at a higher multiple of forward earnings, and many growth-oriented tech names command far richer valuations. A lower multiple can be a sign that the market is pricing in slower growth or persistent margin headwinds—but it can also create an opportunity if the fears prove unfounded.
Morgan Stanley's view is that the market's focus on gross margin ignores the bigger picture: CDW continues to execute well, generate strong cash flow, and return capital to shareholders. The company has a history of steady earnings growth, and its position as a leading IT reseller gives it scale advantages that smaller competitors can't match.
What it means for investors
For everyday investors, the key takeaway is that a single quarter's margin dip doesn't necessarily signal a long-term problem. Companies often see temporary margin fluctuations due to product mix, seasonal factors, or one-time costs. The question is whether the underlying business remains healthy.
In CDW's case, the strong Q2 beat suggests demand is still there. The margin softness could be a blip, or it could be the start of a trend—but the market's immediate reaction may have already priced in the worst-case scenario. Morgan Stanley's valuation analysis suggests that even if margins stay under pressure, the stock's current price leaves room for upside.
That said, investors should be cautious about reading too much into any single analyst's view. Morgan Stanley's note is one opinion, and other analysts may disagree. It's also worth remembering that valuation multiples based on future earnings estimates are inherently uncertain—if 2027 earnings come in lower than expected, the stock may not be as cheap as it looks.
For those who already own CDW shares, the key is to watch whether the company can stabilize or improve its gross margin in the coming quarters. If it does, the stock could recover. If not, the market's concerns may be justified.
CDW's situation is a reminder that earnings season often brings volatility, even for companies that beat expectations. Investors who focus on the long-term fundamentals rather than short-term noise tend to fare better.
For more on how other companies are navigating similar dynamics, see how Siemens Energy's strong quarter still left analysts cautious on valuation, or how Ferrari lifted its 2026 revenue target after a strong second quarter. And for a look at how margin improvements can boost results, check out LIC's quarterly profit jump on better margins.
