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TheStreet Open House

5 Undervalued, Unloved Technology Stocks

Stocks in this article: MSFTDELLHPQLXKGLW

4. Dell (DELL) is the world's third-largest supplier of personal computers. Its focus on the consumer segment hurt its financial performance during the Great Recession. Dell's revenue has stagnated since 2007 and its net income has dropped 18% annually, on average. Dell's earnings per share decreased by 14% a year, on average, during that span.

Quarter: Dell's third-quarter net profit more than doubled to $822 million, or 42 cents a share, as revenue jumped 19% to $15 billion. Dell blew past analysts' consensus adjusted earnings target by 39%, but it missed on the top-line by 2.2%. The non-GAAP operating margin rose from 5.7% to 7.6%. Though consumer revenue dropped 4%, every other unit posted double-digit percentage gains. Europe, Middle East and Africa revenue rose 15%. China and Japan sales climbed 29%. Large enterprise sales gained 27%. Small and medium business sales rose 24%.

Valuation: Dell's stock trades at a trailing earnings multiple of 17, a forward earnings multiple of 9.2, a sales multiple of 0.5 and a cash flow multiple of 7.2, 19%, 39%, 85% and 43% discounts to computer and peripheral peer averages. Its PEG ratio of 0.2 reflects an 80% discount to estimated fair value. Of researchers following Dell, 18 advocate purchasing its shares, 18 advise holding and two recommend selling them. A median target of $15.30 suggests a 12-month return of 11%. Dell popped 2.9% yesterday. Still, the stock has dropped 4.3% year-to-date.

Catalyst: Dell has $14 billion of cash on hand for inorganic growth. However, it does not pay quarterly dividends, so share buybacks appear to be more likely. Dell lost a bidding war for 3PAR to Hewlett-Packard (HPQ) this fall. It is nevertheless eager to expand software, service and cloud offerings. It has completed four acquisitions, for Exanet, KACE Networks, Ocarina Networks and Scalent Systems, in 2010. A deal for cloud-computing software-as-a-service company Boomi was announced Nov. 2 and is pending.

Bullish Scenario: Deutsche Bank forecasts that Dell's stock will advance 46% to $20.

Bearish Scenario: Barclays values Dell's stock at $14, implying it is just below fair value.

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