We have written a couple of times about our morbid pre-occupation with DELL Computer. While the world has been hiding under its desk and hunkering down under the twin spectres of nuclear meltdown and democracy contagion in the oil patch, Michael Dell has been buying $150 million more of his stock. And it’s not like he needs anymore of it to diversify. According to our friends at the Washington Service, he now owns 273.39 million shares. So what does Michael see that Wall Street is missing.
While the world, me included, awaits every tidbit of news and product announcement from Apple Computer, businesses around the world are mired in a Microsoft centric universe. I’m such an Apple fan that I run 4 30″ Apple Cinema Displays on a Mac Pro tower running WINDOWS!!. But I am telling you to buy both Dell and Apple but you will make more money in the short-term with DELL. This is what Wall Street is missing.
- There is no viable alternative for the back-end of most businesses other than Windows. I’m talking about the business of serving up huge volumes of content, running reams and reams of storage. If a business is going to stay with Windows, they will have few choices of P.C.s, mid range servers and the like. Some percentage of them will buy DELL. Wall Street just doesn’t seem to grasp this and analysts treat Dell like it’s a dying business. It’s not. In fact Windows is still growing. Apple seems to have its hands and coffers full building all of the neatest consumer gadgets in the world. There is no question there OS, their hardware, and their customer service is far superior to anything offered in the Windows world but they dont’ seem interested in business. In fact they recently and quietly abandoned their X server product.
- Using our fave tool ValuePro, the DCF valuation of DELL is $21.53. But that’s using old net operating margins of 3.83%. When I tweak this to reflect recent results last quarter of 8.9% margins, the value leaps to $43.29 and when I change the interest rate assumptions to reflect a 4% ten-year, the value goes to $50.16. That’s the beauty of Value Pro’s neat and free tool that you can easily change the inputs for a lot of what if scenarios.
- So as long as Apple doesn’t want the hard-core business side, there will be room for DELL. And instead of a dying breed, DELL could grow at 5.5% rate based in these cash flow assumptions. The moment though that Apple decides to go after this business, I would unload DELL but that time hasn’t come.
The first point is a bit confused. It’s mixing OS with Hardware. You can run Windows on Dell’s better competitors such as HP and IBM very nicely and with great global support. But both HP and IBM have a better blend of consulting and cloud services than Dell.
On the OS side businesses have great choices with Windows, Linux, HP-UX, and AIX. Because MS-SQL still can’t reach the high end of Oracle or DB2. So I don’t agree that Dell wins due to limitations of choices.
The biggest threat to Dell will be cloud services as these business forego buying their own HW. This leaves whoever is going to provide cloud services in the driver’s seat for hardware selection. And then let’s not forget the growth in global markets and which HW companies can support Asia Pac and LATAM the best.
Dell maybe deserves a bit better P/E ratio but is balance sheet of assets to liabilities is at a draw, meaning they to perform every quarter. In most markets there are three competitors with two strong ones and a third weak one followed by dozens of no-names. Dell is the third one.
If you want to play hardware I’m more bullish on Intel. This is because the technology trend favors their XEON line of processors that are legitimately challenging IBM Power line. The big growth will be in cloud services which will be comprised of multi-core processors thus playing to Intel’s R &D. Intel has the same P/E as Dell but kicks but with their income and balance sheets comparatively and pays a dividend.
I think Dell will grow and you can make money on it I just don’t see why it’s worth the bother.
I’m not advocating that Dell wins in a contest between two or three competing computer companies in a vendor selection. I’m simply saying that DELL wins on a valuation analysis. It’s all in the net operating margins and what you believe are sustainable. Both Dell and Intel have strong balance sheets and Intel may be a very good value here too. It probably is. But no one is going to bring Intel private and there is the possibility with Dell of that event. Check out a free tool on DCF analysis mentioned in the post see which one is cheaper for yourself. Intel’s margins are orders magnitude higher than Dell’s but Dell’s are showing significant improvment. Is it sustainable? Michael Dell must think so.