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Dell Technologies: Valuation Remains Attractive, But Secular Risks Bear Watching

Vince Martin profile picture
Vince Martin


  • The sum of the parts case for DELL, based on its massive stake in VMware, hasn't yet played out.
  • That case still looks attractive enough, with the stock likely at a single-digit multiple to consolidated FY21 (ending January) adjusted EPS.
  • But there are risks across Dell and VMware from secular shifts, most notably the move to the cloud.
  • DELL remains a buy, but "value trap" risk needs to be monitored.

The 'sum of the parts' case that I, and many others, have made for Dell Technologies' (NYSE:DELL) stock hasn't played out. Since I made the argument for 'core Dell' fourteen months ago, DELL has declined 19%.

The primary factor has been a similar decline in VMware (VMW), of which Dell owns 81%. But that hasn't been the only factor. Even had an investor hedged out of all of DELL's exposure to VMW (the value of its VMware stake was, and is, greater than its market capitalization), returns would be only about 2% over of that stretch.

'Core Dell' — the value of the business excluding the VMware stake — simply hasn't re-rated as bulls like myself believed it would. Last year, DELL ex-VMW looked almost absurdly cheap, at a range I estimated between 1.3x and 3.4x EBITDA depending on the treatment of debt. This year, core Dell looks just as attractive:

Segment Valuation EBITDA EV/EBITDA
DELL Market Cap $37,150M --- ---
DELL Net Debt* $36,600M
DELL Enterprise Value $73,750M $11,821M 6.24x
VMware $50,558M $4,030M --
SecureWorks $899M $15M --
Total Publicly Traded Stakes $51,457M $4,045M --
Core Dell $22,293M $7,776M 2.87x

Source: author from Dell and VMware press releases and filings. EBITDA figures for trailing twelve months through Q1 FY21. Valuations for VMware and SecureWorks based on Dell's ownership, not total market cap. VMware EBITDA author calculation

* - figure from Dell Q1 earnings presentation. Equals Dell 'core debt' plus $4.0 billion margin loan and $9.1 billion related to Dell Financial Services. Does not include debt held on VMware's balance sheet

The non-VMware assets trade at less than 3x EBITDA. Use just the company's core debt figure, which excludes a margin loan used to purchase VMware stock (and is thus backed by that stake) and Dell Financial Services debt (backed by

This article was written by

Vince Martin profile picture
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.

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.

I am short VMW as a partial hedge to my long position in DELL.

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 (4)

Thomas Lott profile picture
Thanks Vince for the article. Nice job of going through each segment. You have highlighted many of the risk factors here, particularly with Core Dell. My additional observations and opinions (and I could be wrong on the opinion side of course): VMW earnings were super impressive. Rev up 12%, EPS up 21%. Deferred rev up 14%. Worth highlighting. Concerns about migration to cloud only environments have been out there for years, and yet still they are succeeding within the hybrid cloud. I agree its a risk as are containers etc, but hard to say how it plays out.

I would like to hear any thoughts as to what you think the company is worth. I am in the $70-78 range (either via sum of the parts deconstruction, or 12 x $6 in EPS roughly). 12 seems pretty darn conservative, and the current 8.5-9x implies major secular decline concerns, which just seems silly on a consolidated basis. Revenue was up 1.7% in the April qtr.

I probably would quibble with your characterization that hits to VMW are "magnified" at Dell. Quite the opposite. With a sum of the parts value around $77 per Dell share ($61.50 in VMW, and about $15 in value from Core Dell) , there is an implied 33% conglomerate discount. This is oddly about 2x higher then where most conglomerate discounts trade, but we'll save that for another day. So any move in VMW should be mitigated by this 33% discount, not magnified.

I have heard from insiders that VWM employees like their separately traded equity - and some independence from Dell. Certainly SBC (stock based comp) in VMW is more appealing than comp in Dell stock given the growth differentials. If Dell buys out the MI stake in VMW, then how does Silver Lake monetize their stake? How does VMW mgmt feel about losing their shred of independence. Not sure. I believe that Dell/SL want to keep the MI stake public and separate so that SL can ultimately cash out via a spin, but perhaps MSD just buys out SL by issuing them VMW shares. I don't think MSD wants to do that (and give up some ownership in VMW), but who knows. I am not a fan of secular headwind stories, but I think that PC/server/storage declines (if there are declines) won't exceed debt paydowns. That is, over time value is created here with FCF. And quite a bit of value if VMW keeps growing as I suspect.

MSD could push DELL much higher in 2021 and 2022 with share buybacks too. Look at the float dollars vs what potential buybacks could be. Imagine in 2022 after debt is paid down to IG levels, if they use 100% of FCF to buy back DELL shares in the open market. They could repurchase $4-6BB of stock per year - the float of C's is only $12BB. The short scramble and upward pressure on the C's would be tremendous. Anyone who can hold this for just 3 years, probably makes a huge return barring a Great Depression. First, pay down debt, then buy back maybe half the float.

Anyway, thanks for posting, good update. I'm obviously long too!
can you share some of your valuations?
Vince Martin profile picture
in what sense? ie, what do I think DELL is worth? if that's the question, I still think $70 or so at least. I don't think 12x orig FY21 guidance is unreasonable; it's a premium to HPQ/HPE and I think Dell deserves that premium. You can get there another way with core Dell at 5-6x EBITDA and VMW in the low double digits. If I had to issue a price target a la a Street analyst I'd probably go with $75.
what about fcf based analysis? i know it is difficult without historical data, but just for fun
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