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Dell Technologies: Why The Market Is Not Buying A SOTP Argument - A Different Route To 100% Upside

Feb. 27, 2020 10:00 AM ETDell Technologies Inc. (DELL) StockVMW8 Comments
Fundamental Diagnosis profile picture
Fundamental Diagnosis


  • Dell investors are essentially getting Dell's IT hardware business for free while getting VMware at a 25%+ discount. This article explores why this unusual mispricing exists.
  • I propose the market is worried about Dell obtaining full control of VMware and impeding the business, all while the IT hardware business deteriorates against a backdrop of high leverage.
  • I show why it is more likely Dell will buy VMware than spin it off, but I also demonstrate why this concern doesn’t warrant an extreme discount.
  • My proprietary analysis suggests concerns about fundamental deterioration and leverage are warranted under normal circumstances, but investors at today’s levels get a margin of safety with a 7:1 asymmetric risk/reward.
  • My FY21/FY22 EPS estimates for DELL are $6.28/$7.01 (below consensus) reflecting challenges outlined herein. Even with these headwinds, my valuation suggests 100% upside. This is the reason to be bullish.

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Investment Thesis

I predict Dell (NYSE:DELL) is more likely to obtain full control of VMware (VMW) than to spin off its majority position, scuttling the hopes of activists and sum-of-the-parts bulls looking for a quick catalyst. But Dell still has a path to 100% upside via the “scenic route”—a combination of smaller catalysts in FY22 and beyond. These include returning to free cash flow growth, clearing a large bolus of debt maturities, and capturing greater synergies from VMware.

Excluding its VMware stake, Dell currently has negative equity value, despite having positive earnings and free cash flow. This unusual mispricing is caused by fear of a full VMware consolidation and deteriorating hardware fundamentals against the backdrop of a high debt load. These fears are not without merit (as I will show), but the current margin of safety limits the downside risk. Investors with a patient time horizon should consider buying shares now.

Mispricing Created by Fears of VMware Consolidation, Near-Term Hardware Deterioration, and High Leverage

Leading financial publications, prominent sell-side analysts, and multiple Seeking Alpha writers have pointed out the compelling upside suggested by Dell’s sum-of-the-parts ("SOTP") valuation, yet the stock has barely budged. This article explains the market’s concerns but argues that the current valuation dislocation creates a margin of safety with a massively asymmetric risk/reward profile.

To briefly summarize the situation: Dell owns about 81% of VMware, which translates to about $51 billion of VMware equity value, or about $68 per DELL share. The market cap of DELL is valued at less than this - only about $35 billion ($46.95 per share intraday on

This article was written by

Fundamental Diagnosis profile picture
Healthcare, long/short, deep dive.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

FuriousA profile picture
Excellent review. Not just of DELL (and in contrast to the usual SOTP table-pounding conventional wisdom), but also one of the better reviews/research notes I've seen on any company here on Seeking Alpha. Congrats on a good start.
Could you elaborate more on this point: "Most of Dell’s debt is not securitized by VMware assets. In other words, Dell could declare bankruptcy and current shareholders would still come out ahead due to their VMware stake being worth $68 per share!"? Aren't there restricted distribution covenants that prevent Dell from doing this?
Thomas Lott profile picture
Good article. You clearly have done a lot of work here. I pretty much agree w/ most of your conclusions. The value is no doubt there on a FCF basis. Minor quibbles, which is just my 2c.

1) I am in the camp that a buyout is as likely as a spin of VMW. Without SL in the picture, your buy-in of VMW seems quite reasonable. But SL has a far shorter time horizon here, and MSD may just choose to take those shares in a spin and continuing chairing VMW. He likes not being CEO, and rather directing from the sidelines it seems (my sense is Jeff Clarke does more of the Dell heavy lifting). I am not sure aligned fiscal years tells me much honestly. If MSD is looking to buy VMW, do you think he'd sandbag the numbers there as much as possible, to pick it up on the cheap. To me VMW earnings look fine to date. He's a savvy financial buyer - paying a premium for VMW doesn't seem like a typical MSD plan.

2) It seems a bit punitive to view the captive finco sub debt as Dell Core debt. There are many examples of companies that shed their finance subsidiaries (eg an Ally spun out of GMAC). Their AR balances are obviously far higher b/c of the financing bus - so excluding that from the net debt equation doesn't make a ton of sense to me. You balance cash against debt, so why wouldn't you balance LT loans against non-recourse debt tied to those loans?

Anyway, like I said, good piece. There are innumerable ways to win here. Probably surviving a 2020 recession is the biggest obstacle to near term returns. But companies whose net asset values greatly exceed trading levels, generally outperform whether thru SOTP deconstruction or cash used to repurchase shares at exceedingly cheap levels, or simply over time as leverage falls and investors get more comfortable w/ the story and value. Perhaps all three to varying degrees. DVMT was a 44% annual return equity in its existence (if memory serves). No reason to fear MSD imo - which does seem to be an overhang here, ie that "MSD will screw the DELL holders somehow".
The investment horizon on this stock, based on your analysis, seems to be a little bit "long". It'll take several years for investors to be convinced, then the price appreciation follows the sentiment. So, why don't they pick some other stocks with an annual return of mid-teens and hold for the same period of time? Predicting short-term possibilities would be a safer way.
if this company was in the hands of competent company like microsoft, vmware would explode.
small to medium size companies are going full tilt with vmware.
Chris Lau profile picture
We've moved away from Vmware solution because microsoft hyper-v is miles better and easier to use.

Dell itself has two headwinds. First, it has a history of taking investor money. Second, Dell has far too much debt. The rate cut lowers interest rate costs but the pc products are of low quality. Better to hold other PC suppliers for better returns.

Good luck to all!
What’s your take on just buying VMW after it’s recent decline, better financials and potential Dell buying rest of it?
how about the debt?
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