$Dell Technologies Inc.(DELL)$
Dell Technologies (ticker: DELL) is currently trading at $77 per share, experiencing a significant 20% drop on the day. This decline is largely driven by the recent tariffs imposed by the Trump administration, which have hit global supply chains, particularly for companies like Dell that operate internationally. In this analysis, we will explore how these tariffs have affected Dell, dive into its financials using an automated stock valuation model, and assess whether this price drop presents a good buying opportunity for the company. We'll use several valuation methods to analyze the stock's potential, including the Discounted Free Cash Flow Model, Comparable Company Model, Dividend Discount Model, and the Ben Graham Intrinsic Value Formula.
Impact of Tariffs on Dell Technologies
To understand the magnitude of the situation, we need to consider the broader economic environment and how Dell has been affected by the new tariffs. As of late February, Dell was already expressing concerns about the potential impact of Trump's tariffs. The company's COO was quoted as saying, "This is a pretty darn dynamic environment. Whatever tariff we kind of mitigate, we have a view that it has an input cost, and our output cost goes up. So they're going to have to adjust prices." These remarks underline the uncertainty Dell faces in terms of rising costs and potential price hikes, which could hurt their competitive edge in the market.
Since the announcement of the tariffs, Dell has faced challenges, particularly due to its international operations, with a significant portion of its manufacturing and sales outside of the U.S. The company's global supply chains are highly vulnerable to such changes in trade policy, and these challenges are reflected in the stock’s recent performance. Dell’s stock has plummeted 39% year-to-date and is down roughly 50% from its all-time high of $160. This sharp drop signals that the market is reacting strongly to the potential fallout from these tariffs.
A Deeper Dive into Dell’s Financials
With the stock price taking a hit, let’s take a deeper look at Dell’s current financial standing to determine whether the stock is undervalued or whether the market's reaction is justified.
Price and Market Capitalization:
Dell is trading at $77 per share, which places the company’s market capitalization at $54 billion. Given the size and scope of Dell's business, this market cap reflects a significant dip from its previous highs, and it is an opportunity to explore the stock's fundamental valuation.
Price-to-Earnings Ratio (P/E):
Dell’s P/E ratio is currently listed as zero on platforms like Google Finance, which can be misleading since the actual P/E ratio is closer to 12. This is still much lower than the current market average of 26.82, indicating that Dell's stock might be undervalued compared to the broader market. Lower-than-average P/E ratios can suggest that the market is pricing in risk factors—like the potential impact of tariffs—more heavily than the underlying fundamentals would justify.
Earnings Per Share (EPS):
Dell's EPS stands at $5.91, which is solid, especially considering the macroeconomic pressures the company is facing. Analysts have set a target price of $136 per share for Dell, which implies a significant upside potential from the current price of $77. If Dell can weather the tariff impact and continue to deliver solid earnings, this target price is very achievable.
Dividend Yield:
Dell offers a dividend yield of 2.2%, which translates to $1.70 per share. This yield is fairly attractive, especially in a volatile market. Dell’s dividend payout ratio stands at 75% of net income and 88% of free cash flow, which is on the higher side but still within a safe range, making the dividend relatively secure. Given the current price, this dividend is an appealing feature for income-focused investors. Additionally, the company is paying this dividend out of stable earnings, which bodes well for its ability to maintain payouts even in challenging times.
Revenue and Profitability Trends
Next, let's evaluate Dell’s revenue and profitability trends to understand how well the company is performing.
Revenue: Over the past 12 months, Dell generated nearly $92 billion in revenue, a solid performance despite the challenges it faces. While this figure is slightly down from 2022, it is still one of the highest revenue figures the company has reported in recent years. It’s also an improvement over 2024’s revenue. Analysts are projecting $103–107 billion in revenue for the upcoming years, reflecting a more optimistic view for the company as it adapts to current market conditions.
Net Income: Dell’s net income is hovering around $4 billion, which marks the third most profitable year in the company's history. While net income has been declining slightly from its peak in 2022, it has still been increasing over the past few years, signaling that Dell remains a profitable company with solid earnings potential. The growing net income in a turbulent market is a testament to Dell’s ability to manage costs and maintain profitability despite external challenges.
Free Cash Flow: Dell generated $3.36 billion in free cash flow, though this figure is down from prior years. The decline can be attributed to a drop in operating cash flow and an increase in capital expenditures (CapEx). While free cash flow is important for funding operations, acquisitions, and share repurchases, Dell’s ability to maintain positive free cash flow, even in a down year, demonstrates its financial health.
Share Repurchases: Dell has continued to repurchase shares, which is a good sign for investors. Share buybacks help to support the stock price and reward shareholders, particularly when the stock is undervalued, as it is currently. If Dell can continue to buy back shares at current levels, it could help drive long-term value for shareholders, especially when the stock is trading at a discount.
Valuation Models and Buying Opportunity
Now, let’s run through a few valuation models to see if Dell presents a buying opportunity at its current price point.
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Discounted Free Cash Flow (DCF) Model:
Using the DCF model, we estimate Dell's intrinsic value at approximately $60 per share, based on current projections. However, by adjusting the revenue forecasts upwards (given analysts expect $103–107 billion in revenue), the valuation rises to $78 per share, suggesting that Dell is currently fairly valued. This is in line with the current market price of $77 per share, indicating that the stock is neither overvalued nor significantly undervalued at present.
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Dividend Discount Model (DDM):
The DDM requires more historical data to produce an accurate result. Once Dell’s dividend history stabilizes over the next year, this model will offer more insights into the stock’s valuation based on its dividend-paying ability. For now, we can look at Dell’s stable dividend yield as a sign that it’s an attractive investment for those seeking income.
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Ben Graham Intrinsic Value Formula:
According to the Ben Graham formula, which is designed to calculate the intrinsic value of a stock based on its growth rate and bond yield, Dell’s intrinsic value is estimated at $100 per share, suggesting that it is undervalued at its current $77 price point. This model supports the idea that Dell is a good buying opportunity despite the recent price drop.
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Comparable Company Model:
When comparing Dell to its competitors, such as HP Inc. (HPQ), Cisco Systems (CSCO), and IBM, Dell’s price-to-earnings and other valuation multiples appear relatively low. The Comparable Company Model suggests that Dell’s fair value is closer to $80 per share when compared to similar companies in the tech space. Dell has been hit harder by the recent market sell-off than its competitors, which could imply that the market is overreacting to the tariff news.
Final Assessment: Is Dell a Buy?
Despite the sharp drop in Dell’s stock price, the valuation models suggest that the stock is either fairly valued or undervalued at $77 per share. The company’s strong dividend yield, solid earnings potential, and ongoing share repurchases make it an attractive option for long-term investors, especially those seeking income. While tariffs may continue to impact Dell’s profitability in the short term, its financial health, growth potential, and market positioning make it a compelling buy at current levels.
Looking at Dell’s performance over the last year, it has erased almost all of its gains from early 2024, indicating a rough year for the stock. However, over the past five years, Dell has returned more than 300%, significantly outperforming the broader market. If Dell can navigate the challenges posed by tariffs and maintain its growth trajectory, this stock has the potential to rebound strongly in the future.
In conclusion, based on the comprehensive valuation analysis, the stock is a buy at $77 per share, with strong long-term upside potential, particularly as the market overreacts to the tariff-induced headwinds. As always, investors should consider their risk tolerance and investment horizon, but for those looking for an opportunity to buy a solid tech company at a discount, Dell seems to fit the bill.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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