Summary
- Dell stock continues to suffer due to lowering its revenue forecast for the current fiscal year.
- Despite that, earnings per share guidance is actually higher, and debt reduction impressive.
- We view the selloff as misguided, as it continues to trade at a significant discount to every comp out there (NTAP, CSCO, HPE).
- This discount makes little sense given the market share gains Dell is making across the board too.
- I am nibbling on shares this week, but believe DELL might remain in the penalty box for a while.
- Looking for a portfolio of ideas like this one? Members of Cash Flow Compounders get exclusive access to our model portfolio. Get started today »
The article was also shared with PRO+ Tech subscribers - find out more about PRO+ here.
There always seems to be one name in my portfolio that gets the best of me. Dell Technologies (DELL) lately has been a frustrating name for holders, and it reminds of the highly volatile trading pattern exhibited by Tech Data (TECD) over the past few years.
Tech Data’s business is lumpy, and not terribly predictable. Sometimes Apple (NASDAQ:AAPL) sold a lot of products in a quarter, and TECD results would be great. Other times, a revenue or slight EPS miss would be dealt with harshly. The price change on earnings day literally was all over the map. It frequently dropped up to 20% in a single day after an earnings report. Rough.
The past decade has not been a friendly time to own low revenue growth, but high earnings growth business models. That said, since our first buy recommendation in May 2013 (here), Tech Data has generated 18.3% annual returns for shareholders, a triple in terms of return in a bit over six years. (SPY has been up 12.7% per year since that day).
But back to Dell. Today, like TECD, there are revenue growth concerns, and it trades at an abysmal 6.7x earnings. But it generates a ton of free cash flow, and is easily 50% undervalued.
Just don’t expect this to be an easy path toward realizing value; some fortitude and patience will be required.
Per our math, DELL’s sum of the parts discount is one of the largest I have ever seen in the market, indicating that likely investors are concerned about the following:
- Michael Dell and Silver Lake somehow “screwing” the current Class C equity holders.
- Secular PC/storage demand decline fears, especially in light of Intel processor shortages, and likely component inflation next year having an impact on margins too.
- VMware (NYSE:VMW) competition, cloud migration.
- Balance sheet worries.
Let’s take these in turn.
Dell Control Risk
While the markets see Michael Dell as a vulture, and to some extent he is, most of his past actions were simply very smart acquisitions. The DVMT Class V transaction arguably was a better deal for Michael Dell than DVTM holders, and is likely on most investors’ minds today.
But in that case, Michael Dell and Silver Lake owned entirely different share classes (Class A and B, respectively), where incentives were not aligned. Those parties stood to benefit immensely from a deal to convert the tracking class stock into Dell holdco shares at a discount to VMW (the entity in which it was meant to track).
