Dell Technologies (DELL) is on better competitive footing than when its stock last traded on public markets back in 2013, and its current valuation isn't especially high.
However, several of the IT giant's businesses are likely to see their top-line growth slow meaningfully in 2019, and some of them are also contending with long-term growth pressures. And with the recent market selloff having produced discount valuations for many tech names with strong long-term growth profiles, investors might want to look elsewhere for now.
Following the closing of a cash-and-stock deal to buy out holders of its DVMT tracking stock -- it represented a 53% economic interest in virtualization software giant VMware (VMW) -- Dell's Class C shares began trading on the NYSE on Friday. Shares opened at $46.00, and closed Friday at $45.43.
With Dell stating it has 754.9 million shares outstanding after the close of the DVMT deal and $44.4 billion in net debt (cash minus debt) as of Nov. 2, the company currently sports a market cap of about $34 billion and an enterprise value of slightly over $78 billion.
That $78 billion enterprise value covers not only Dell's fully owned businesses, but also an 80% stake in VMware and sizable positions in Pivotal Software (PVTL) and security software and services firm SecureWorks (SCWX) . Dell's stake in VMware, is officially worth $52.1 billion, while its stakes in Pivotal and SecureWorks are worth $2 billion and $1.1 billion, respectively.
However, VMware is set to pay an $11 billion, one-time dividend to shareholders on Dec. 28, and Dell plans to use the $8.9 billion in proceeds that it gets from the dividend to help pay for the $14 billion cash portion of the DVMT buyout. After backing out Dell's portion of the dividend proceeds, the VMware stake is worth $43.2 billion.
In addition, it's common to apply a discount to equity stakes as large as the one Dell possesses in VMWare. This is both due to the liquidity challenges involved with selling any large portion of them -- if Dell tried to quickly unload, say, a fifth of its VMware stake via open-market sales, VMware's stock would plunge -- and the tax payments that are owed following the sale of a stake at a profit. If one applied a 25% discount to Dell's stakes for these reasons, that would leave their combined value (following the VMware dividend) at $34 billion.
This in turn would spell an enterprise value of about $44 billion for the rest of Dell, which over the 12 months ending Nov. 2 had non-GAAP net income of $2.4 billion and free cash flow (FCF) of $2.8 billion. Those numbers imply Dell's fully-owned businesses are currently valued at slightly over 18 times its trailing non-GAAP earnings and slightly less than 16 times its trailing FCF, in the event that a 25% discount is applied to its equity stakes.
That's perhaps a fair valuation for Dell proper, which over the first nine months of 2018 saw its revenue grow 17% and its GAAP operating income grow 22%. Dell proper's ongoing share gains in the PC and server markets, together with its solid financial execution and (through its Extreme Scale Infrastructure server business) meaningful exposure to heavy-spending cloud giants, merit a moderate valuation premium relative to peers such as HP Enterprise (HPE) and IBM (IBM) . Those two companies have had a harder time delivering meaningful top-line growth and are less-exposed to cloud giants.
But at the same time, the short-term and long-term growth pressures facing Dell can't be overlooked when valuing the company. Both Dell's PC and server/storage sales benefited in 2018 from enterprise hardware upgrade cycles, and are likely to see slower growth in 2019. And its cloud-related revenue growth is also likely to slow, given recent signs of a near-term moderation in cloud capital spending growth.
In addition, looking at Dell's long-term growth outlook, it can't be ignored that the PC market has declined for much of this decade, and that server and storage sales to traditional enterprises are being gradually cannibalized by public cloud infrastructure adoption. It's also worth noting that selling servers to cloud giants is generally seen as a low-margin and highly-competitive business (just ask HPE). And that unlike its PC and server businesses, Dell's storage business, which stems in large part from its 2016 acquisition of EMC, has lost share in recent years.
None of that makes Dell a bad company. Indeed, compared with at least few old-guard enterprise IT giants, there's a lot to like about its recent top and bottom-line execution.
However, with Dell proper's multiples merely looking reasonable at current levels rather than dirt-cheap, and with many tech stocks likely to see stronger long-term growth now on sale, better deals currently exist for tech investors.
This story has been updated.