Dell Technologies is considering strategic options for its 81% stake in VMware.
Patrick T. Fallon/BloombergOne tricky question around the recent speculation that Dell Technologies is considering strategic options for its 81% stake in VMware is how the market would value the core Dell business. As we noted a few weeks back, there are concerns that a stand-alone Dell would be a less appealing asset than a Dell packaged with VMware.
Deutsche Bank’s Jeriel Ong took a look at that issue on Tuesday and asked a simple question: How much would Dell (ticker: DELL) be worth on a stand-alone basis? He thinks there is a reasonable chance it would be worth 20%-30% more than the current share price.
“If it is Dell’s goal to illuminate and remove the valuation discount that the stock carries as a result of its VMware ownership, then we believe that the next natural question is to understand how/where Dell could trade as a stand-alone entity post separation,” he writes. Note that while Dell’s market cap is about $39 billion, the value of its VMware stake is about $50 billion.
Ong says isn’t saying that Dell necessarily will sell or spin off its VMware (VMW) stake, but he does think it makes sense to consider what a stand-alone Dell might be worth. He thinks it should trade for a multiple of 4.75 times enterprise value to next 12 months Ebitda (earnings before interest, taxes, depreciation, and amortization), or about four times enterprise value to next 12 months sales. That would be a discount to its enterprise-computing peers, reflecting among other things founder Michael Dell’s controlling stake in the company.
Ong notes that Dell doesn’t have a perfectly matched peer group, with various parts of its portfolio competing with Hewlett Packard Enterprise (HPE), HP Inc. (HPQ), Lenovo Group (992.Hong Kong), NetApp (NTAP), and IBM (IBM). If you compared Dell with the average valuation of those companies, he says, it trades at a discount of about 50%. He thinks a separation of the VMware stake from Dell could reduce the valuation discount but wouldn’t likely fully close the gap.
“Overall, our analysis suggests ~20-30% upside to Dell from a multiple expansion perspective should the company trade stand-alone,” Ong writes, though he keeps his current $60 price target given there is no clarity on what Dell will actually decide to do with the VMware stake.
Dell shares were down 2.2%, at $52.90, in recent trading. The S&P 500 was down 0.6%.
Write to Eric J. Savitz at eric.savitz@barrons.com
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July 08, 2020 at 02:01AM
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Stand-Alone Dell Worth 30% More Than Current Price Implies, Analyst Says - Barron's
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