Dell Is an IT and PC Behemoth, But That Doesn’t Lead to a Moat

Business Strategy & Outlook

Born out of Dell’s 2016 acquisition of EMC, Dell Technologies is a pre-eminent vendor of IT infrastructure and PCs. Although Dell has substantial exposure to commoditized markets, its ability to bring the cloud to organizations is a growth opportunity and the company is expected to benefit from PC and workplace productivity product demand brought on by remote work needs. Dell has taken massive strides to trim its debt load via cash injections coming from divestitures, as well as spinning off VMware in November 2021. Dell’s business centers on PCs and peripherals, servers, storage, and networking equipment, as well as software, services, and financial services. Its brands include Dell, Dell EMC, Secureworks, and Virtustream.

The company’s largest revenue streams of commercial PCs and servers are in tough pricing environments that can rely on services and support to generate profit. The overall PC market is projected to continue consolidating toward an oligopoly, with profits coming from high-end notebooks, gaming PCs, and peripherals. While storage is a challenging marketplace, flash-based arrays and hyperconverged infrastructure provide avenues for growth. A commercial agreement with VMware should continue providing Dell’s hardware with a unique selling proposition. Dell Technologies as an end-to-end IT infrastructure provider that is supplementing hardware prowess with emerging software and cloud-based solutions. Its ability to bring the cloud to customers via its hybrid cloud offerings as organizations face challenges adopting public cloud is met with optimism, but competitive markets are anticipated to challenge the company’s overall profitability. With Dell Technologies achieving an investment-grade capital rating after the VMware spinoff, it is expected to have flexibility in investing for growth and rewarding shareholders via a new quarterly dividend and through share buybacks. Public shareholders have very little influence on the company’s strategy and rely heavily on CEO Michael Dell and Silver Lake Partners making value-accretive decisions.

Financial Strengths

Dell Technologies’ core debt load (outside of Dell Financial Services) as the main hindrance to its financial strength, but the firm’s financial health is projected to greatly improve through cash flow generation and paying down debt. Using its portion of VMware’s special dividend, as part of the spinoff, to repay obligations helped increase Dell’s credit rating into investment-grade territory. After returning to the public market in December 2018, the total debt load was approximately $55 billion versus an estimated $6 billion cash and cash equivalents. The company has placed a priority on paying down its debt balance over shareholder returns. As of the end of fiscal 2022, Dell Technologies had about $27 billion in total debt and $9 billion in cash and equivalents.. The company has taken strides to restructure debt, sell off assets, and improve its cash flows, which is expected to give better flexibility in investing for growth and potential shareholder returns. Outside of operating costs, debt repayments will take priority in the near term. As of fiscal 2023, Dell pays a quarterly dividend as well. As an investment-grade organization, Dell will look for targeted acquisitions to help expand into higher-growth areas for cloud workload management, edge, and open telecom solutions.

Bulls Say

As a supplier with an end-to-end IT infrastructure portfolio, Dell Technologies has significant upselling and cross-selling opportunities.

Through its cloud-based products, higher-margin nascent technologies, traditional hardware prowess, and tight VMware product integrations, the company is well positioned to be a leader in hybrid cloud environments.

Dell Technologies’ healthy cash flow is focused on paying down debt and creating a more balanced longterm capital structure that can support future investments.

Company Description

Dell Technologies, born from Dell’s 2016 acquisition of EMC, is a major provider of servers, storage, and networking products through its ISG segment and PCs, monitors, and peripherals via its CSG division. Its brands include Dell, Dell EMC, Secureworks, and Virtustream. The company focuses on supplementing its traditional mainstream servers and PCs with hardware and software products for hybrid-cloud environments. The Texas-based company employs around 133,000 people and sells globally.

(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.