2024-01-04 16:51:14 ET
Summary
- Dell Technologies gets its Hold rating from August reaffirmed today. This sentiment is in line with the consensus from SA analysts and the quant system.
- Strong earnings growth and steady dividend income, along with penetration of AI-driven market segments make this one to hold on to.
- The company remains in negative equity, however, debt levels have come down by half since 2021.
Stock & Industry Snapshot
After a hiatus of several months not covering tech stocks, in today's note I'm returning to an old favorite to cover in the big tech space, and it's none other than Texas-based Dell Technologies ( DELL ).
Here are a few quick points about this company for readers less familiar with it. It has its roots in 1984 in a University of Texas dorm room and its namesake Michael Dell, while today it calls itself one of the world's leading tech companies. Its products and solutions run the spectrum of hardware such as laptops and monitors to services such as support solutions and cybersecurity advisory.
In my prior coverage of Dell in August , around 5 months ago, I called it a great hold opportunity and since then it seems the share price has gone up +37%.
Dell - price since last rating (Seeking Alpha)
In my very first note on this stock in May , I called it a buy opportunity and since then I saw the share price go up about +68% as of today.
Recent sector performance from SA market data shows that the tech sector has shown strong 3-year performance improvement of +44%, and 1 year performance of +51% , although going into the new year it is showing some pullback.
The prior sector bullishness in the last year should be considered when we later look at Dell's price chart in detail, so this is a relevant topic as a sector overheated can pull up individual stocks, though not always.
Dell - tech sector data (Seeking Alpha)
Though I do not hold Dell stock, I would say this brand over the decades has always been part of my daily routine in some way whether from owning their laptops or using their hardware at IT jobs I have held, to having lived in the Austin area where they are headquartered and where it is common to meet someone at least once who worked a stint at their Round Rock headquarters.
However, as an analyst I am taking off the user and customer hat for a moment and putting on the investor hat to answer the question: is Dell currently a buy, sell, or hold?
Scoring Matrix
We use a 9-point scoring method that looks at this stock holistically and assigns a total rating score, using a score matrix.
Today's Rating
Based on the score total in the score matrix , this stock is getting a rating of hold.
Compared to my last rating, it reaffirms the same sentiment.
Compared to the consensus rating on Seeking Alpha, I am agreeing with analysts and the quant system this time.
Dell - rating consensus (Seeking Alpha)
Dividend Income Growth
The first item we should look at is the 10 year dividend growth , using the chart below.
What this chart tells us is that Dell did not pay a dividend for many years, so if I had bought 100 shares in 2014 I would have made $0 in dividend income until 2022 when the annual dividend was $0.99/share. The following year, it jumped to $1.44, a 45% growth in 1 year.
My sentiment going into 2024 is positive as it appears the annual dividend will be up to $1.48 ($0.37/share/quarter) according to the dividend history data .
Based on strong earnings growth shown in the income statement , and positive cash flow , I think this sets up a greater chance of the company continuing its dividend increases into 2024.
With that said, I will call it a buy, for going from a non-dividend stock to a dividend-income opportunity in a few short years, and continuing that growth.
Dividend Yield vs Peers
Next, besides dividend growth trends I also care about what kind of dividend yield this stock gets me for my capital invested, and whether I can get a better yield from its peers. The following chart helps in this:
In this comparison, I am comparing 4 peers that are major tech stocks and heavy into hardware and solutions. Of these, HP ( HPQ ) has the best dividend yield at 3.56%, while Lenovo ( LNVGY ) trails behind at 3.48% and Cisco ( CSCO ) 3.07% and Dell with 1.93% , the lowest.
I think the skyrocketing share price of Dell, which I will go into later, also has pushed the yield down to under 2%.
In this scenario, I would call it a sell for having the worst yield of this peer group. I mean you are only getting $0.37/share per quarter but paying over $76 now to buy the stock. You can get HP stock for just under $30 and earn $0.27/share per quarter, for a company that also has shown YoY earnings growth and profitability.
Revenue Growth
For this section we have to look at the income statement which provides a wealth of relevant data.
We can see from the data that in the quarter ending November total revenue fell to $22.25B vs $24.72B in Oct 2022, a 9.9% YoY decline.
From their fiscal 2024 Q3 results that came out on Nov. 30th, we can see declines in both of Dell's key business segments:
Infrastructure Solutions Group delivered third quarter revenue of $8.5 billion, flat sequentially and down 12% year-over-year. Client Solutions Group delivered third quarter revenue of $12.3 billion, down 11% year-over-year and 5% sequentially.
One positive area of growth I want to mention in this tech space is Dell's positioning in AI-focused hardware solutions, particularly AI-optimized servers:
Orders nearly doubled sequentially and increased to roughly 33% of our server orders revenue in Q3.
Also I would point out that Dell continues to maintain a leading market position in several key segments, particularly leading what I think it is best known for among the general consumer and that is selling computers across America:
Here I am giving it a hold rating. On the one hand revenue declined on a YoY basis but by less than 10%, and on the other hand this firm has leading market positions in key segments as well as penetration of a major growth segment which is anything related to artificial intelligence. So, not a firm I would throw out with the bath water just yet, so to speak, when considering the big picture.
Earnings Growth
Also from the income statement , we can take a look at earnings data, which showed stronger results than top-line revenue.
Dell achieved $1B in earnings in the quarter ending November, vs $245MM in Oct 2022, a 308% YoY growth.
More importantly, we can see an upward trend in earnings between Oct 2022 and Nov. 2023, so not necessarily a one-time phenomenon.
The company remarks indicated that they "reduced non-GAAP operating expense 5% Y/Y and will continue to focus on cost management."
We can also see in the income statement that total operating expenses fell on a YoY basis, as did selling/general/admin expenses.
Also notable is that earnings per share ((EPS)) is showing strong growth as well:
Dell - EPS growth (company results)
I expect that positive earnings growth can be sustainable going forward, primarily driven by lower costs combined with top-line growth drivers that can be potentially penetrated by Dell, as seen in the graphic below:
So, in this category I would call this stock a buy, on the basis of proven earnings and EPS growth but also falling expenses as well as solid growth potential that could help earnings going forward. In fact, the company mentioned they are "increasing FY24 diluted EPS guidance" in their quarterly presentation.
Equity Positive Growth
When looking at the balance sheet , one thing that sticks out right away is that Dell has had negative equity for quite a while, with liabilities exceeding assets.
Although there is negative equity, on a YoY basis equity (book value) has improved.
The fact is, Dell has a lot of long-term debt. In fact, in the quarter ending November they had $15.89B in company debt, although it fell vs Oct 2022, a good sign.
On the one hand, the company has a strong cash position at $8.29B, and has been able to operate with negative equity ever since Jan. 2022. On the other hand, personally my portfolio strategy is to avoid investing in companies with negative equity. So, for that reason and the sheer amount of debt this company is sitting on, I would have to say sell in this category.
Share Price vs Moving Average
Using the below YChart, we can see the share price has climbed ever since spring and now is up to $76.64, nearly +33% vs the 200-day SMA.
My strategy in the event of this level of market bullishness on a stock would be to ask whether earnings, revenue, and equity have also been growing strongly and if the dividend yield is compelling to make this a solid buy opportunity.
The reality is that the company has negative equity, strong earnings growth, and lackluster revenue growth along with less than a 2% dividend yield.
In this case I would say hold, with positives being the strong earnings growth but offsetting that is the weak revenue growth and negative equity.
Valuation: Price-to-Earnings
Valuation data tells us that the forward P/E ratio is now 19.83x earnings, nearly 30% below the sector average.
What I think is driving this multiple is the steeply climbing share price that is double-digits above its 200-day moving average.
At the same time, though, earnings also showed strong growth. This is an important factor to consider.
If comparing to peers, I would pick HP in this case who also had earnings YoY growth while having a P/E of 10x earnings, a much better valuation in my opinion.
At a multiple of 19.8x earnings, I would consider Dell more of a hold in this context.
Valuation: Price-to-Book Value
Also from valuation data , I care about the price-to-book value (forward P/B ratio). As of now the P/B is not able to be analyzed due to negative equity.
We also cannot analyze return on common equity , since equity is negative.
So, I am compelled to call it a sell in this category.
Risk Analysis
The risk I see here which I cannot understate in the current high interest rate environment is the company's +$15B in long-term debt.
In fact, SA analyst Hunter Reinhart highlighted the risk of too much debt at Dell back in his 2019 article:
Having more liabilities than assets always poses a threat for liquidation and long-term potential of bankruptcy.
It was reported in 2021 by Ars Technica that a lot of the borrowing resulted from taking on debt to finance major deals:
Dell has been weighed down by debt after borrowing about $70 billion to finance its dealmaking.
Wall Street has also been wary of the complex financial engineering used to hold together the heavily indebted group.
The good news is that I care about longer trends more than one-time events, and in this case core debt has been on the decline lately, approaching the company's own target of 1.5x core leverage.
Dell - core debt (company quarterly presentation)
We can even look at the balance sheet again and see that debt was at $32.8B in Aug 2021 and now it is +51% lower, so practically has gone down by half.
In that context, I consider this risk category worthy of a hold rather than a buy or sell, because of the declining debt levels opening the door for an improved equity picture heading into 2024.
Quick Summary
To summarize, from a holistic standpoint I am keeping my hold rating on this stock from August, despite individual factors pointing to either a buy or sell.
Drivers of my neutral rating are an inflated share price combined with positive earnings growth and single-digit revenue growth, offset by continued negative equity and a dividend yield below several peers.
The risk of high debt is on an improving trend at this company, while at the same time it has market penetration of growth drivers such as AI, along with existing strong market share in segments like servers and consumer PCs.
My portfolio strategy in this case would be continue holding on for the steady dividend income of $0.37/share per quarter, and for investors that bought Dell last spring by now should be seeing a significant unrealized capital gain. The question then is whether big tech will see the overheated bull market it had in 2023 repeat itself in 2024, and I think it likely will be more tepid but also will see continued tailwind from the "AI" hype that is not going away soon.
For further details see:
Dell Technologies: A Steady Dividend Play And Potential For AI-Driven Future Growth