Dell Technologies is a technology company that was founded in 1984. The company has seen its fair share of ups and downs, but it remains a major player in the technology space. In this blog post, we will do a valuation and analysis of Dell Technologies stock. We will also discuss some of the risks and opportunities associated with investing in Dell stock.
What is Dell and what does it do?
Dell is a technology company that was founded in 1984 by Michael Dell. The company started off as a small computer retailer, but it has since grown into a major player in the technology space. Dell Technologies is now made up of several different brands, including Dell, Alienware, and VMware. Dell makes money by selling computers, software, and other technology products and services. The company also has a significant presence in the cloud computing market.
The Dell transformation
In the 2000s – Dell was the market leader, but as we all know, the PC industry was disrupted by the invention of smartphones and tablets. This had an impact on the demand for the main products that Dell was selling.
2013 – In an attempt to transform the company, Michael Dell took the company private in 2013 in a $24. billion leveraged buyout. The move gave Dell the time it needed to make the necessary changes to its business model without having to worry about short-term quarterly results or activist investors.
2015 – EMC was acquired for $67 billion, mainly funded by debt. This was the largest technology acquisition in history.
2017 – Dell Technologies is formed after the merger of Dell and EMC. The company now has a market cap of $39 billion.
Dell is a company that was disrupted and decided to transform, and there's a good story behind it. Instead of selling certain hardware, it decided to provide additional solutions, become a one-stop shop, and leverage the relationships with the existing customers. Of course, there was a price to pay, so looking at today's Dell, it is very different compared to Dell back in 2013.
The EMC acquisition was a huge step, and comparing the purchase price ($67b) to Dell's current market cap ($40b), gives us a good insight into the significance of this transaction. This is still the largest tech acquisition to this date.
Dell's stock structure
The company has two main reporting segments:
Segment #1 – Client Solutions Group (the segment that is related to the sale of hardware in the form of desktops, workstations, notebooks, and peripherals) – This segment grew from $40b in 2017 to $60b in 2021, but the majority of the growth came in 2021 (partly due to price increases).
Segment #2 – Infrastructure Solutions Group (related to the sale of storage solutions, servers, data protection, networking) – This segment hasn't experienced huge growth over the last 5 years and it went up from $30b to $35b, however, has a bit higher margin than the first one.
Last year, they also had a third segment related to VMware, but as it was divested, it doesn't add any value to make this post longer, so I will skip that for now.
Being aware of the huge debt they raised back in 2015, one of the main targets of the management was to reduce it over time. In the last report (year ending January 2022), the outstanding debt was close to $27b (excluding capital leases). This amount was significantly reduced with the divestment of VMware ($38b the year before).
Recently, the company announced that they've decided to be a dividend-paying company and the dividend yield on today's price is around 2.5%. Every time that a decision like this is made see this decision, its usually as a signal/admission that the company is generating enough free cash flow after covering all of its operating expenses as well as making the debt-payments, but as they don't have a great option to invest in, it's best to return the cash back to the shareholders.
The company had $100b in revenue in the last twelve months ($5b come from VMware which is divested), with an operating margin of around 5%. However, there's almost a 2% expense on the income statement related to the amortization of goodwill. In my valuation, I am forecasting the free cash flow, so I'm adding this back as it is a non-cash movement. As for the depreciation/amortization of the assets that they need to replace over time, I'm leaving that amount in, assuming they'll need to reinvest roughly the same amount to keep the same level of business activity. Therefore, my assumption for the operating margin is 6.5% and doesn't change over time as based on the growth over time, it is fair to assume Dell is a mature company.
Dell's revenue growth
I am assuming fairly low revenue growth (3% annually in the next 5 years, followed by a decline to the risk-free rate of 2%) which leads to revenue of $132b in 10 years.
Although I've mentioned the reinvestments to maintain the same level of business activity, assuming the company grows from $95b for the last twelve months (the revenue excluding VMware) to $132b, they would need to make additional reinvestments. Historically, the Sales/capital ratio has been around 2, so I'm using the same assumption. For every $2 in revenue, I am expecting that Dell invests $1 in capital (whether that is PPE or inventory).
Dell's stock valuation a potentially attractive purchase
With the current revenue of $100b and margin of 6.5%, the operating profit is $6.5b.
Assuming a tax rate of 25%, that goes down to almost $5b (without taking the tax impact of amortization of goodwill)
Based on the reinvestment rate, they'll be reinvesting around $1.5b per year, which leads to a free cash flow of roughly $3.5b – almost 9% of the current market cap.
I ran these assumptions through a DCF, and the outcome was $76.9/share based on the risk it has.
The discount rate used was 6.7% based on WACC.
What if the revenue and operating margin assumptions change?
Below is a table that shows the fair value based on different assumptions about the future related to the revenue in 10 years from now and the operating margin:
|Revenue / Operating margin
What you can see is that the revenue growth assumption doesn't have such a large impact on the fair value, but the operating margin has. So, if I'm to invest in Dell, I'll be more closely monitoring the change in the margin over time.
Valuations don't need to be so difficult
Valuing a company like Dell is simpler than you think, assuming you have done your research on the company as we have done. After this crucial step, all you have to do is enter your assumptions in your discounted cash flow model (DCF) and find the intrinsic value of the company.
Of course, this is easier said than done, which is why we have developed a DCF template that allows you to easily run a DCF model by just changing the company ticker and the assumptions instead of wasting so much time copy-pasting the data manually.
We wish you all the best with your stock investment journey.
The Wisesheets Team