Could Dell’s PC Business Double Its Stock Price?

| About: Dell Inc. (DELL)

In recent years, Dell’s stock price has shrunk considerably and is now around half of its $30 level in 2007 at $14 today. This is due to a slowdown in tech spending, company specific issues and greater competition from competitors like HP (NYSE:HPQ), Apple (NASDAQ:AAPL) and, more recently, Acer and Toshiba. Surprisingly, our current estimates show that Managed Services and Consulting account for 20% and cash 15% of Dell’s company value.

We wanted to explore what scenarios could help Dell (NASDAQ:DELL) regain the $30 level by looking specifically at its traditional notebook and desktop businesses. The key drivers to these businesses are: 1) pricing, 2) market share and 3) profit margins (measured by EBITDA).

By looking at scenarios with our modifiable charts, we estimate that the notebook unit could add around $8.00 and the desktop unit could chip in another $4.00 to our current prices estimate of $18.38 for Dell’s stock, which is about 30% percent above its current market price.

+$8 Notebook Segment

Notebooks and netbooks sales make up 16% of the Trefis price estimate for Dell compared to under 4% for its desktop unit. For the notebook business we currently forecast that average prices will decline by over 50% from $828 in 2010 to $398 in 2016 due to cheaper notebooks and netbooks being sold in emerging markets. If Dell can maintain a drop of around 25% to $600 instead, similar to the drop in prices between 2006 and 2009, this makes up about 40% of the price increase.

By extension better pricing should translate to improved profit margins estimates, and if we estimate a modest improvement in blended EBITDA margin (Dell does not break out its margins by notebooks and desktops) of 7% by 2016 between its notebook and desktop businesses versus remaining at 5% as we currently expect, then we are almost to our $8.00 improvement.

Finally, we assume that notebook market share grows to 17% by 2016 from our current estimates of 14% in 2010 with gradual declines thereafter. These combined actions add $8.00 to the stock price estimate.

+$4 Desktop Segment

Dell’s desktop business has struggled in recent years in part due to a slowdown in corporate spending. We wrote earlier this week that the corporate PC refresh cycle has begun in earnest according to Microsoft (NASDAQ:MSFT) management. ((See Microsoft Rises on PC Refresh Cycle)) If corporate IT budgets indeed pick up meaningfully, Dell could be a leading beneficiary.

Our current estimates forecast desktop prices to drop dramatically to around $200 by 2016 from current levels of $630. If desktop prices drop by about half of this amount to $400 by 2016, the desktop business receives a small boost.

Then Dell simply needs to maintain current market share levels of around 16% versus our estimated declined to 12% by 2013, and once we factor in the better blended notebook and desktop profit margin of 7% mentioned above, the desktop unit adds $4.00 to our price estimate.

Disclosure: No positions