Total sales for Dell Technologies (NYSE:DELL) was $104.37 billion in the Trailing Twelve Months (TTM), and the company earned $8.48 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization).
Dell’s (NYSE:DELL) leadership in consumer and infrastructure hardware, growth across high-margin businesses like cloud and virtualization, and ability to navigate high-debt could position the company for long-term success, even though higher interest rates present a material risk to the highly-leveraged company.
Introduction
Server hardware solutions, computing and networking products, storage,i and the Dell APEX platform comprise the Infrastructure Solutions Group. In contrast, the Client Solutions Group is responsible for the bulk of Dell’s revenue and profit ($13.78bn and $1.06bn in Q3 revenues and operating income, respectively).
The company’s long-term goal is to generate value in both directions. It plans to do so via initiatives including expanding its roll-up sales approach for business clients and expanding its presence in the edge market for hybrid and multi-cloud offerings.
Valuation and Financials
Brief Overview
Because Dell has not recovered from the rest of the market and because its future potential is being discounted compared to that of its competitors, I think Dell is fundamentally undervalued.
However, Dell’s decline is understandable, given the impact of fiscal and monetary tightening on the company’s sales and debt service costs.
Similar Businesses
Dell has no direct competitors since it operates in so many different markets. So I went with firms that deal in client and infrastructure goods but do not provide the same services as Dell or firms of a comparable scale that is direct rivals. Although Lenovo’s (OTCPK:LNVGY) income comes mostly from client sales, the company does have a presence in the infrastructure sector. International Business Machines (NYSE: IBM) has recently expedited its entrance into the cloud and hybrid environments.
Dell’s higher margins and second-best multiples-based value, behind only Lenovo, show that it offers greater intrinsic value to its rivals.
While I believe Dell stock is facing an inherent undervaluation, Lenovo’s undervaluation is due to a geopolitical risk premium due to the company’s location in Hong Kong.
In addition, the fact that Dell’s TTM price has fallen indicates that the company is regressing to the mean and has the opportunity to expand.
Valuation
My discounted cash flow analysis indicates that Dell is 37% undervalued at a minimum of $66.23 per share. The model uses a discount rate of 12%, wich equals Dell’s 10.6% WACC plus a risk premium associated with its high debt levels, and runs on a net income basis.
A relative valuation technique that uses multiples like P/S, P/E, and P/B supports the idea that the firm is undervalued. At a price of $95.16, it predicts an undervaluation of roughly 56% in the baseline scenario. However, their heavily indebted situation of Dell is not reflected in this price.
Accordingly, Dell should be valued at $75.87 using a weighted mean, which provides greater weight to the DCF.
Achievable Synergistic Infrastructure
Dell’s capacity to produce synergistic revenues and growth is predicated on the expansion of its Infrastructure Solutions Group and, in turn, its client business.
For instance, Dell may use its extensive worldwide services footprint, made possible by its massive installed base of business clients, to facilitate introducing hybrid cloud services.
Dell’s ability to provide goods and services at both ends of the data and computing spectrum allows them to produce complementary value for customers when the macro computing cycle shifts back to decentralized products and the Internet of Things (IoT).
And Dell is aware of the possibilities. Dell’s APEX platform consolidates its products’ technology. It fosters customer loyalty in exchange for increased profits from ongoing software support contracts. This increases Dell’s speed in tapping into its core business TAM of $720 billion.
The Opinions of Wall Street
Analysts share my bullish outlook on the stock, projecting a one-year price objective of $49.32, up 18.84% from today’s levels.
Dell’s price is predicted to fall by just -6.02% at its lowest price objective, demonstrating modest susceptibility to changes in external economic circumstances and internal financial restrictions.
Risks
Maintaining a Low Debt Ratio
High amounts of debt have a multiplicative effect on the impact that increasing interest rates have on Dell. They also significantly influence the company’s input prices and capacity for R&D. It’s possible, therefore, that their late entry into the multi-cloud market may hinder their long-term competitiveness, despite the fact that they’ve grown rapidly and impressively.
The Company Runs the Risk of Internal Disconnect
Dell faces the danger of spreading its resources too thin, reducing its already sluggish margins if it fails to properly merge its two primary business sectors.
Material Recessionary Pressures
Since big firms are more vulnerable to recessions than SMEs, a probable recession or recession-like circumstances, brought on by rising interest rates and contractionary fiscal and monetary policies, might lead to a significant drop in demand for enterprise goods. This seriously threatens Dell’s bottom line since its enterprise division is responsible for the bulk of its revenue.
Conclusion
Dell stock is expected to rise shortly thanks to the company’s relative undervaluation, robustness in key retail sectors, and sustained supremacy in infrastructure hardware.
Considering the greater margins in the APEX platform that is trying to link the two through a multi-cloud enterprise strategy, I feel Dell’s position allows them to achieve synergetic growth across their two primary divisions.
As of this writing, Dell has declared that it would be laying off 6,650 workers; this move indicates the company’s capacity to quickly adjust to changing economic conditions beyond only responding to macrotrends.
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