Dell is worth $20 despite weak earnings

As the tech company changes its business model to focus on services, it can use its cash to make acquisitions and develop products.

By Trefis Jun 5, 2012 1:15PM
TrefisFor the past four quarters, Dell (DELL) has generated $4.9 billion in cash flow. The company recently reported results with revenue of $14.4 billion, slipping 4% year over year. Earnings per share for the quarter were 36 cents, down 27% from the previous year, while cash used in operations in the quarter was $138 million.

Dell ended the quarter with $17.2 billion in cash and investments. Its major competitors are IBM (IBM) and HP (HPQ) -- the global leader and Dell's rival in the PC market.

Dell Stock Break-Up

Short-term pain as business model changes

The sizable cash and investments could be used for acquisitions and product development, such as the Windows 8 tablet, as Dell changes its business model to focus on services. Its focus on enterprise and service was shown by the fact that Enterprise Solutions and Services revenue grew 2% year over year to $4.5 billion. Dell Services division (including Perot Systems) grew 4% with a 9% increase in order backlogs, storage products grew 24%, and its server and networking grew 2%. Consumer revenue was $3 billion, a 12% decline year over year.


Outlook and guidance

The company expects second-quarter revenues to be in line with historical seasonal trends and be up 2% to 4% from first-quarter levels, which would mean a revenue of $14.7 billion to $15 billion. We believe the revenues, however, may pick up faster than expected as the effect of its recent acquisitions begin to contribute.


Recently, Dell acquired Clerity, Make, Wyse Technologies and SonicWall, providing a foothold in virtual desktops and thin clients as well as networking, security and firewalls. It can also leverage its Force10 acquisition to challenge networking companies such as Cisco and Juniper. All of these companies came with large client base and mature distribution channels that will compliment Dell's sales reach and capabilities. Weakening sales in Europe are a point of worry with Dell reporting EMEA revenue down 1%.


We currently have a $20.48 Trefis price estimate for Dell, which is much higher than current price estimates.


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