Dell Continues To Be 50% Undervalued Despite Cycle Pressures

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.
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There always seems to be one name in my portfolio that gets the best of me. Dell Technologies (NYSE: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 (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

Analyst’s Disclosure:I am/we are long DELL. 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.

Long TECD