Is Dell Stock a Buy?

Dell Technologies Inc (NYSE:DELL) is a multinational computer technology company founded in 1984 by Michael Dell. It expanded its offerings through a $67 billion merger with enterprise storage and software company EMC Corporation. But it spun VMware off by late 2021 to focus on its multi-cloud strategy while Dell strengthens its core.

Is the slimmed-down Dell Technologies a buy?

The two companies will retain its commercial agreements after the spin-off, and Michael Dell remains the chair of both boards, although he’s only the CEO of Dell Technologies. That means the companies will largely be running as they had been. The deal was a boon for investors who received 44 percent of a VMware (NYSE:VMW) share for each Dell share held.

Dell still has a strong positioning beyond its initial role as a PC maker. It’s a bona fide technology conglomerate that survived some rough periods over the past decades. This new incarnation offers hope to long-term investors that a significant growth lever could transform their fortunes.

Dell Is No Apple But Competitors Will Struggle

Dell Technologies is a Round Rock, Texas-based technology company with two main operating segments:

• Client Solutions and
• Infrastructure Solutions.

Its client solutions segment sells PCs, peripherals, HDTVs, cameras, and other electronics for consumer and business usage. Dell Computers grew in popularity for its build-to-order business model, along with a then-innovative e-commerce approach for direct sales.

Dell’s subsidiaries include Alienware, EqualLogic, Perot Systems, Wyse, and StatSoft. Dell’s 2015 EMC purchase created a subsidiary called Dell EMC, which is its infrastructure branch. It sells data storage, information security, analytics, and cloud computing and remains a major market player.

Its vertical integration from manufacturing through distribution, along with marketing, makes Dell a very difficult company for less well capitalized firms to compete with.

> Check out these other technology stocks to consider buying or read on to learn more about the cloud computing market.

Cloud Computer Market Growing 19.1% Annually

The personal computer (PC) was once the foundation of both enterprise and consumer usage. But the shift to mobile devices, wearables, and the internet of things (IoT) sparked a decline in desktop PC shipments.

Desktop PC manufacturers shipped 157 million units in 2010, and the forecast for 2025 is under 70 million, according to Statista. Meanwhile, tablet sales are expected to increase from 19 million to 140 million in the same timeframe.

Although modern tablets have a lot of power, they’re not capable of performing with as well as a decked-out desktop PC. But they don’t have to, thanks to a cloud computing market valued at around $275 billion in 2020.

By storing data and running more complicated processes on cloud servers, both consumer and enterprise devices can be leaner. And that’s fueling a projected 19.1 percent compound annual growth rate (CAGR) in the cloud computing market.

Major PC makers like Dell, Lenovo (OTCMKTS:LNVGY) and Hewlett Packard (NYSE:HPE) had to pivot into other markets. So, how did VMware fit into the equation?

The VMware Spinoff

According to the press release issued November 1, 2021, Dell Technologies spun-off VMware to provide it “a simplified capital structure and governance model, and additional operational and financial flexibility.”

VMware gives businesses the ability to better manage resources by running multiple workloads on one server through a virtual machine. Virtualization is a core part of any enterprise IT stack, because it’s an effective way to use available technology.

Dell reduced its net debt and improved its credit rating with the move, but this could anchor DELL share price, as VMware was responsible for $3.1 billion in revenue in the second quarter. On the plus side, the company still earned $22.7 billion from its remaining business.

In fact, its fiscal year guidance expects three to four percent compound annual revenue growth.  

Dell Share Buyback A Boon For Shareholders

Dell’s board recently approved a $5 billion stock repurchase program alongside the VMware spinoff. It also plans to implement an annual dividend in its fiscal 2023 first quarter. That will return another $1 billion to shareholders each year.

Its free cash flow declined year-over-year ending at $1.103 billion by the end of its FY Q2, down from $2.788 billion in the same period a year ago. Excluding VMware leaves it with only $473 million in free cash flow.

Dell’s projected gross margins should be around 30 percent by year end, and its as-a-service revenue continues to keep this number in check.

It also has about $16 billion in debt that will be paid down for the year, thanks to the VMware sale. It already paid down $5.5 billion in debt heading into the transaction closing.

This means investors should benefit as interest rates and debt payments are lowered.

Dell Growing In A Shrinking PC Market?

Dell is still a leader in the global PC market, but that market is shrinking, as we pointed out at the top.

The $9.3 billion in cash it received after transaction fees from the VMware sale went straight to paying off debt to fix its books.

It continues generating income from the global server market and recently introduced APEX cloud services. The company needs to grow its core market segments, which are highly competitive. 

Is Dell Technologies Stock a Buy: The Bottom Line

Dell Technologies share price was cut in half overnight, as it spun off VMware during the 2021 holiday season. This made it an attractive value buy for investors seeking growth, and the upcoming dividend payments should sweeten the deal.

As a global leader in both PC and network infrastructure sales, Dell is well positioned to provide promised returns to shareholders. If you’re seeking a tech company to add to your portfolio.

After running a discounted cash flow forecast analysis on Dell financials, we arrive at a fair market share price value of $63.71 per share, representing double digit upside from the current share price at the time of research.a

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.