Dell (NYSE:DELL) spinning higher as investors envision bright future following VMware transaction
3:45 pm Thursday, September 23rd, 2021
With Dell’s (NYSE:DELL) landmark spin-off of VMware (VMW) quickly approaching, the company made a series of announcements that paint a bullish picture for the soon-to-be stand-alone company. Specifically, DELL reaffirmed its 3Q22 guidance for mid-to-high teens revenue growth, announced a $5 billion share repurchase program, and stated that it expects to initiate a quarterly dividend with an “attractive yield” beginning in 1Q23. Longer-term, the PC, laptop, and server provider believes that it can generate compounded annual revenue and EPS growth of 3-4% and 6+%, respectively, through FY26.
After acquiring VMW as part of its ~$60 billion acquisition of EMC in September of 2016, DELL diversified its business and increased its exposure to the faster growing cloud-based data storage market. With the massive VMW investment, DELL attempted to hedge itself against the accelerating transition away from tradition on-premise storage — which DELL specializes in — while positioning itself to reap the benefits of VMW’s stronger growth.
Whether this monumental deal was a success is debatable. Although DELL rallied sharply from September 2016 through early 2018, the stock did basically nothing from that time until the pandemic hit in the spring of 2020. Although DELL captured some of the momentum that materialized for VMW as enterprises increasingly adopted hybrid and public cloud infrastructures, the company also became saddled with debt. To finance the EMC acquisition, DELL took on a whopping $50 billion in debt, which acted like an anchor on the stock. As of July 31, 2021, DELL’s total debt amounted to $45.8 billion.
When COVID-19 began spreading around the world, the game suddenly changed for DELL. The once dormant PC and laptop businesses began to boom as employees streamed out of offices in huge numbers to work at home. Simultaneously, massive amounts of data flowed to cloud service providers like Amazon (AMZN), Google (GOOG), and Microsoft (MSFT), seemingly leaving DELL behind. However, enterprises also gradually began to upgrade and modernize in-house IT infrastructure systems. This is evidenced by the 3% revenue increase in 2Q22 for DELL’s Infrastructure Solutions Group.
As DELL’s Co-COO Jeffrey Clarke explained during the 2Q22 earnings conference call, there is currently a constant rise in demand for technology, regardless of whether economies are closed or opened, or whether employees are at home or are at the office.
