- An announcement to cut 6,650 jobs on the back of a cold and dark year for the PC industry has been announced at Dell Technologies
- Markets may be punishing Dell stock more than is justified, as the company has a growing high-margin business within their ISG segment taking over industry ranks
- A quick look at the company's financials and future prospects may show a contrarian - and profitable - view pointing to 21%+ upside and near 4% yield in dividends.
- 5 stocks we like better than Dell Technologies
As Federal Reserve Chairman Jerome Powell and his colleagues strive to gain significant ground in the battle to tame inflation, employment remains expendable collateral damage amidst this giant shift in policy. Technology companies - expressed in their typically higher betas - are more sensitive to changes in fiscal policy, particularly rising interest rates.
The first wells to dry out were online advertising revenue streams as individuals and businesses overall cut down on their marketing and advertising budgets. The trickle-down effects of inflation and higher interest rates, which hit the consumer at the same time, were definitely seen in disappointing tech earnings from firms like Amazon.com NASDAQ: AMZN, Alphabet Inc NASDAQ: GOOG, and Meta Platforms NASDAQ: META.
As the COVID-induced demand for PCs and peripherals took off along with remote and hybrid work structures, manufacturers saw a boom in sales, margins, and overall valuations. As a result of all good things coming to an end and the demand for PCs ultimately slowing down to normalized historical levels, firms that depended on such demand saw their revenues drop significantly. Companies like Intel Corp NASDAQ: INTC were affected by this industry-wide decline in demand to the extent that they were one of the first hardware and chip makers to effect layoffs in the space.
If my friends do it then so will I
All of these giant players in the PC, chip and peripherals space are not unique nor special in the way they have attempted to cushion the start of what could be a very long dry spell on demand. Turns out, Dell Technologies NYSE: DELL Has joined the party - albeit late - by laying off as many as 6,650 workers recently, justifying a restructuring in the workforce.
The company noted that PC and peripherals are taking their hardest hit yet, and has quickly responded by contracting its workforce to a total size not seen since 2017. Looks like Dell has followed the lead on these layoff initiatives from other peers in the industry. However, the copy behavior seems to have stopped there.
While other firms have posted severe declines in revenue, Dell Technologies has expanded its top line by a five-year average annual growth rate of 11%, achieving operational profitability and nearly doubling its margins while at it. This is no small feat for a firm trying to find its way through the many challenges the industry has had to go through during the COVID pandemic.
An ace up their sleeve(s)
Dell Technologies is not the hardware-only company that markets know and sometimes love. Management has taken a hard turn toward expanding its Infrastructure Solutions Group (ISG) segment, growing it to represent up to 22% of the revenue generated. While this segment is still up and coming in terms of sizable income, it has lots of promise, carrying gross margins of 43-48%, versus 15-18% for their hardware business, according to their latest results presentation.
This lucrative segment comprises anything that caters to the 'digital revolution', from servers and storage for individuals and businesses alike to data management and analytics for similar audiences. A year-over-year revenue growth of 12% and 35% operating income growth for the business speaks volumes about the progress management has been making on this market pivot.
Another performance yardstick investors can consider is the positioning against other major firms trying to penetrate the data revolution space. Dell Technologies has penetrated 28% of the market share for External Enterprise Storage, 42.5% of the market share in High-End Storage, 14.2% of the market share in x86 server units, competing head-to-head with Intel Corp NASDAQ: INTC, 45.5% of the market share in PC workstations, and dominating positions in many other verticals in which Dell operates.
Severely underestimated by the market
All of these expanded cash flows in the firm have allowed for further pivots and pursuits into higher-growth markets. More importantly than ambitious promises, investors enjoy the benefits of a positive cash-flowing business as it has been approving bigger and bigger share buybacks and dividend payouts for investors.
In the past quarter, Dell Technologies announced that they would be raising their annual dividend by 12% to $1.48 per share, an increase that far beats inflation for those investors focused on earning a current 3.8% yield. If that was not enough for those faithful stakeholders, the company has repurchased 62.4 million shares in the open markets. If management is betting the company's money on the same company, investors should be encouraged to do so.
What is very interesting is Dell's balance sheet, as total current assets (those that can be converted into cash within the quarter or sooner) account for a value of $55 per share. This means that even if the company made zero dollars in the next quarter, liquidated all its current assets, and distributed them to investors as a cash payout, it would still be worth more than what the entire company is selling for today.
Perhaps this has aided analysts to assign a 25% upside to the stock, on top of the current dividend yield and active share buybacks that management has no intention of stopping. Worthy of keeping around on a watchlist
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