Mr. Market Made A Mistake: Dell

| About: Dell Inc. (DELL)

A Textbook Value Play

When the general outlook on a company is negative the stock tends to become undervalued. When this happens a buying opportunity is created. This is the case with Dell (NASDAQ:DELL). Recently, Dell's stock has become undervalued due to the company's unpopularity in the tech industry, as well as the pessimism surrounding the future of the personal computer. I determine valuation by evaluating a company's products or services, management quality, and fundamentals.



Right now Apple (NASDAQ:AAPL) leads the tech industry due to two major and temporary advantages: Marketing hype and Reliability. Many people are willing to pay twice as much for an Apple product as for its less popular counterpart, like Dell computers, laptops, or tablets for the brand name alone. The smart shopper will search for the better product. I've owned both Apple and Dell products, as well as researched them extensively. The only consistent advantage of the costly Apple products was their reliability, but newer windows based computers are becoming more reliable. This is a result of the advancement of their hardware, antivirus software, and the operating systems that they use. The quality of the products made by Dell is catching up to those made by Apple, and soon, Apple will lose a big part of its cult-like following to the reasonably priced, high quality alternatives produced by Dell.


A vital quality of good management is the ability to adapt to a changing market. In this category, Dell is very competitive. Dell is entering the new cloud computing business, which may be an integral part of the technology industry in the future. Dell recently reached an agreement to acquire Credant Technologies, which is a company that provides protection for data transferred between remote servers and the cloud. Dell has also been chosen to help the military healthcare system by implementing its "Unified Clinical Archive" system. The contract is worth up to $45 million dollars for Dell. Sometimes I view a company stepping out its usual niche as a sign of desperation, but in this case I feel differently. Dell is still a leading manufacturer of desktop and laptop computers. The new operations will supplement Dell's income while the cyclical computer industry is depressed, and when Dell's sales make a recovery, the extra income will only add to the company's value.



Dell currently has over $10 billion dollars in cash, with assets totaling just over $45 billion, and liabilities worth $35 billion. These numbers indicate that Dell has adequate liquidity to continue normal operations. Dell recently had a bad earnings quarter, but Dell's earnings are still in a longer term uptrend, and maintain reasonable stability and growth. Dell's year-to-date decline of 30% has given the company an attractive valuation, regardless of the metric you prefer.

  • Price/Earnings ratio: 7.15
  • Price/Sales ratio: 0.31
  • Enterprise Value/EBITDA: 3.60
  • Price/Earnings/Growth ratio: 1
  • Return on Equity: 27%
  • Forward Dividend Yield: 3%


My analysis indicates that Dell is drastically undervalued and as a result: a low risk investment with long term potential for high returns. Please do not invest in Dell based only on what you have read in this article. I based my decision on much more research than I have included in this article. Do more in depth research to determine if you agree with my thesis and if you can ignore the short term market swings that may scare many investors out of this position before big profits are seen. If Dell continues to fall, I will do nothing but increase my position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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