Dell Surges After Agreeing to Cash Dividend for VMware Spinoff

Dell Technologies Inc. (DELL) shares jumped 8.5% in extended-hours trade Wednesday after the PC maker said it plans to proceed with a spinoff of its 81% stake in enterprise software firm VMware.

The deal, which both parties expect to close in the fourth quarter, will see Dell and its shareholders receive a collective one-time cash dividend of $11.5 billion to $12 billion from VMware. Management said it intends to use the proceeds from the transaction to pay down debt and position the company for an investment-grade credit rating.

“After a comprehensive review of potential strategic options, both parties determined that this transaction will simplify capital structures and create additional long-term enterprise value,” Dell said in a statement cited by CNBC.

Through Wednesday’s close, Dell stock has a market capitalization of $70 billion and trades 26.48% higher since the start of the year. Over the past 12 months, the shares have gained around 125%. Valuation wise, the stock trades at 11.39 times projected earnings, slightly above its five-year average multiple of 10.64 times.

Wall Street View

Earlier this month, Morgan Stanley analyst Katy Huberty raised the investment bank’s target on Dell to $107 from $98 while maintaining her ‘Overweight’ rating. As well as being bullish about the VMware spinoff, Huberty believes higher PC demand and exposure to the mid-market supports earnings moving forward.

Broker research elsewhere remains mixed. The stock receives 12 ‘Buy’ ratings and 9 ‘Hold’ ratings. Currently, no analysts recommend selling the shares. Twelve-month price targets range from a Street-high $110 to a low of $79. As of yesterday’s close, the shares trade at a 3% premium to the $90 median target.

Technical Outlook and Trading Tactics

Dell shares have remained in a steady uptrend over the past year, with gains accelerating in recent weeks. This may indicate that investors have baked in most of the positive news surrounding the VMware spinoff. Furthermore, the relative strength index (RSI) has made a shallower high relative to price over the last month, suggesting waning momentum from the bulls.

Active traders should think about taking a short sale if the stock stages an intraday reversal Thursday. In terms of trade management, look to buy back the shares near last month’s swing low at $84.81. This area also finds support from the 50-day simple moving average (SMA). Protect capital with a stop-loss order placed above the high of today’s price bar.

Dell Chart

For a look at today’s earnings schedule, check out our earnings calendar.

Dell Reports Surprise Revenue Growth in Q3; Target Price $82

Dell Technologies Inc, an American multinational technology company headquartered in Texas, reported a surprise quarterly revenue growth of about 3% to $23.48 billion as demand for remote working devices and desktops and notebook computers increased during the COVID-19 pandemic.

The leader in digital transformation said its total revenue rose 3% to $23.5 billion in the three months ended October 30, beating market expectations of a drop of 4.4% to $21.85 billion. Diluted earnings per share up 64% to $1.08, non-GAAP diluted earnings per share up 16% to $2.03, in line with the Wall Street estimates.

“Dell had record shipments, revenue, and profitability for its computer division, helping make up for weakness experienced within the server and storage business unit. While the pandemic may only be a temporary gusty tailwind for computer demand, we believe Dell’s hybrid-cloud offerings can provide it with a sustainable presence in the IT infrastructure stack for customers. We are maintaining our $65 fair value estimate and see shares as fairly valued,” said Mark Cash, equity analyst at Morningstar.

Dell forecasts revenue to grow 3% to 4% in the fourth quarter, implying a range between $24.18 billion and $24.42 billion, higher than the market expectations of $23.09 billion.

“While explicit guidance was not provided for fiscal 2022, Dell is cautiously optimistic that the demand environment for IT spending is improving. The company also believes it may be on the cusp of achieving investment-grade credit quality, which is up to the agencies and will continue to prioritize paying down its obligations,” Morningstar’s Cash added.

Dell Technologies shares closed 1.37% higher at $70.33 on Tuesday; the stock is up over 35% so far this year.

Executive Comments

“We met unprecedented demand for remote work and learn solutions this quarter while increasing revenue to $23.5 billion. At the same time, we accelerated our as-a-Service strategy and hybrid cloud capabilities at the edge – positioning us to win in these growing markets and making it easy for customers to manage data and workloads across all their operations,” said Jeff Clarke, vice chairman and chief operating officer.

Dell Technologies Stores Stock Price Forecast

Ten equity analysts forecast the average price in 12 months at $72.78 with a high forecast of $82.00 and a low forecast of $60.00. The average price target represents a 3.48% increase from the last price of $70.33. From those ten analysts, seven rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $82 with a high of $116 under a bull-case scenario and $39 under the worst-case scenario. The firm currently has an “Overweight” rating on the technology company’s stock. JP Morgan raised their target price to $80 from $70 and UBS assumed coverage with a buy rating and set the target price at $80.

Several other analysts have also upgraded their stock outlook. Evercore ISI raised their target price to $75 from $70; BofA Global Research upped their price objective to $75 from $70; Deutsche Bank increased their stock price forecast to $72 from $65; RBC raised their target price to $80 from $48; Citigroup upped their price target to $75 from $55.

Analyst Comments

“Dell is a full-stack technology provider managing more data than any other IT provider, which positions the company well to capitalize on the ‘Data Era’. A path to IG rating in the next ~12 months along with accelerating market share gains across ISG and CSG segments warrant a valuation in-line with peers,” said Katy Huberty, equity analyst at Morgan Stanley.

“Dell’s strategic evaluation of its VMware stake (announced 7/15/20) and commitment to go-to-market synergies positions the company to unlock trapped value while retaining operational exposure to a key asset. Our base case valuation assumes a 50% probability of a VMware spin, meanwhile, our bull case valuation assumes a 100% probability,” Huberty added.

Upside and Downside Risks

Risks to Upside: 1) VMware spin and cash dividend accelerate core debt pay down. 2) Faster recession recovery & pent up demand. 3) Stronger share gains across PCs, Servers and Storage – highlighted by Morgan Stanley.

Risks to Downside: 1) Dell and VMW don’t agree on terms for a VMW spin. 2) Longer recession accelerates public cloud migration & legacy server/storage declines. 3) Rate of share gains across servers & storage is short-lived. 4) Slower debt paydown vs guidance.

Check out FX Empire’s earnings calendar

Dell Technologies Exploring Options of $50 Billion Stake Spinoff in VMware

Dell Technologies Inc, an American multinational technology company headquartered in Texas, is exploring options of a spinoff for its $50 billion stake in VMware Inc to increase its stock value, according to a Wall Street Journal report.

The tech giant has recently sought options either to sell its existing stake or consider other options, including the full buyout of VMware. People familiar with the matter told the WSJ that the companies are working with outside advisers. The share offload will also come a long way in helping Dell to ease its $48 billion debt load.

However, both the companies are unlikely to ink a deal this year as the examinations are at an early stage and Dell may even choose to opt-out and do nothing.

The review is aimed at addressing the difference in Dell’s market value – roughly $36 billion as of June 23 and the 81% stake value in VMware. The gap indicates that Dell’s PC and data storage business is gaining very less or no attention in the market. However, dismantling the companies could add value further, the international daily newspaper based in New York City added.

Immediately after The Wall Street Journal reported on the review, investors’ optimism soared, pushing shares of both companies higher. On Tuesday, Dell shares jumped over 14%, following a 1.5% gain to close at $49.01, while VMware climbed 8% and closed about 1% higher $149.23.

Dell outlook and target price

Eight analysts forecast the average price in 12 months at $48.57 with a high of $55.00 and a low of $42.00. The average price target represents a -0.90% decrease from the last price of $49.01, according to Tipranks. From that, two analysts rated ‘Buy’, six rated ‘Hold’ and none rated ‘Sell’.

It is good to buy at the current level for the short-term as 20-day Moving Average and 20-200-day MACD Oscillator signals a buying opportunity.

On June 1, Citigroup raised price target to $55 from $40. Last month, Deutsche Bank raised price target to $55 from $52, Instinet raised to $55 from $35, Credit Suisse raised to $44 from $41 and Evercore ISI raised target price to $54 from $46.

VMware outlook and target price

Eighteen analysts forecast the average price in 12 months at $170.31 with a high of $200.00 and a low of $140.00. The average price target represents a 14.13% increase from the last price of $149.23, according to Tipranks. From that, twelve analysts rated ‘Buy’, six rated ‘Hold’ and none rated ‘Sell’.

It is good to buy at the current level as 50-day Moving Average and 100-200-day MACD Oscillator signals a buying opportunity. Today, Stifel raised to ‘Buy’ from ‘Hold’; raised target price to $196 from $166. In May, CCFRA raised to ‘Buy’ from ‘Hold’, raising the target price to $180 from $154; BMO to $165 from $152 and Wells Fargo raises to $200 from $190.