Dell (DELL) — a Top Pick for 2023 — was born in a dorm room at the University of Texas by Michael S. Dell, who remains chairman and CEO, notes Jim Kelleher, an analyst with Argus Research, a leading independent Wall Street research firm.
Dell has followed its own path in the technology hardware space. The company took a PC business and layered on enterprise infrastructure assets including servers, storage, and networking. In recent years, Dell's ability to leverage strength in one core competency in order to support the other has resulted in a balanced performance. In the current era of PC unit weakness, Dell's strategy certainly appears timely.
The company went private in 2013 in order to acquire the world's biggest storage company, EMC, and run operations without being beholden to shareholders. And it sold the inexpensively acquired VMware at a significant premium to purchase price in order to retire a big slug of EMC acquisition-related debt. As of fiscal 3Q23, debt is at its lowest level since fiscal 2015, prior to its acquisition of EMC.
Over time, financially leaner Dell aims to unlock value in its Client Solutions and Infrastructure Solutions businesses. Notwithstanding current challenges related to inflation and potential economic slowing, Dell intends to leverage long-term revenue growth in the 3%-4% range into annual growth of 6%-plus in non-GAAP EPS through fiscal 2026.
Dell's historical valuation is complicated by the fact that DELL shares resumed trading at the end of 2018 after the company went private in 2013. We note that Dell remained a profitable business through its private period. Additionally, distribution of the special dividend of VMWare shares reduced the DELL share price in half.
The stock trades at 5.5-times our FY23 non-GAAP EPS estimate and at 5.0-times our FY24 non-GAAP projection. The two-year average forward P/E of 5.3 is below the historical P/E (FY18-FY22) of 8.3.
DELL is deeply discounted in relation to multiples for the S&P 500, trading at a relative P/E of 0.31 on a two-year forward basis, compared to an historical relative P/E of 0.42. Historical comparables value is in the mid-$60s, rising and above current prices.
Dell is trading at discounts to peers on absolute and relative P/E, price/sales, and EV/EBITDA. Our peer calculated value for DELL has jumped above $100, rising given its positive fundamentals and some moderation in the tech selloff. On a discounted free cash flow basis, which assumes stronger cash flow as Dell pays down debt, we calculate a terminal value of $245, in a rising trend.
In all, our blended valuation for DELL is above $200 and in a rising trend despite the tech selloff. Appreciation to our 12-month target price of $70 implies a total potential return, on a risk-adjusted basis, in excess of our forecast market return and is thus consistent with a "buy" rating.