Does this trade have any more advantages?
As early as October 2020, we realized that computing and storage solutions were of great importance Dell Technologies (NYSE: DELL) Stock was a better choice compared to consumer tech giants Apple (NASDAQ: AAPL). Now, eight months later, trading has done pretty well, with Dell stock up nearly 50% since our recommendation, while Apple stock is only up about 10%. The S&P 500 has gained about 22% over the same period. So if you bought $ 10,000 in Dell stock and sold $ 10,000 short in Apple stock (a net investment of $ 0) on Oct. 9 when we posted our analysis below, your account would be around $ 4,000 up. That’s a pretty decent return.
So what drove the two stocks over the past few quarters? Dell benefited from strong sales of its commercial and consumer PCs as remote working and learning trends continued to fuel demand and helped the company significantly outperform street estimates for the past three quarters. In the first quarter of FY’22 (fiscal years ended January), sales rose a solid 12% to a record $ 24.5 billion in the first quarter. Separately, Dell announced that it would outsource its 81 percent stake in the leading cloud computing and virtualization technology company VMware
So is there another benefit to this trade? We don’t believe While Dell only trades at around 12x its forward profit compared to Apple, which trades at a more expensive 24x forward profit, Apple’s P / E has shrunk since last year, while Dell’s multiple has increased is. Based on the consensus numbers, Apple’s growth prospects are also much better: Revenue is expected to grow nearly 30% this fiscal year, compared to about 7% for Dell. Dell also operates in a highly competitive industry and most of its products are off-the-shelf and have low margins (operating margins of around 5%). Apple, on the other hand, has much higher margins (operating margins in excess of 25%) and its competitive position is also stronger due to its device and software ecosystem.
See our dashboard analysis on Dell vs. Apple: Are Dell Stocks Still a Bargain Compared to Apple?
[10/9/2021] Select Dell Technologies Stock Via Apple
Dell Technologies (NYSE: DELL), a provider of computing products and storage solutions, is trading at only about 0.6 times the decline in sales compared to Apple which is traded at 7.5 times the trailing turnover. Does it make sense? Although Dell is one of the dominant players in the corporate IT and cloud space, given its high level of debt, exposure to relatively standardized and highly competitive markets, and a relatively complex corporate structure after years of closing deals that include: Delisting, a major acquisition and a relisting. Apple, on the other hand, has seen its valuation spike in recent quarters as investors view the stock as a kind of safe haven from Covid-19 while anticipating a surge in sales from the upcoming 5G iPhones. However, let’s take a step back to see the more complete picture of the relative valuation of the two companies by looking at historical sales growth, returns (ability to generate profits from growth) and risk (sustainability of profits).
See our dashboard analysis on Dell vs. Apple: is Dell stock a bargain compared to Apple? Parts of the analysis are summarized below.
1. Sales growth
Dell’s fiscal year 20 revenue of approximately $ 92 billion is roughly a third of Apple’s revenue. Apple’s sales for the past four quarters were $ 274 billion. However, Dell’s growth has outpaced Apple over the past three years, partly due to the EMC acquisitions (which closed in mid-fiscal 2017). Revenue is growing at an average rate of 14% per year (from $ 62.2 billion in FY 2017 to $ 92 billion in FY 20), down from about 6% at Apple.
- Dell’s growth was driven by its Infrastructure Solutions division, which sells storage solutions and servers. The segment’s revenue rose from $ 22 billion in fiscal 2017 to approximately $ 34 billion in fiscal 20, driven in part by acquisitions. The Client Solutions segment, which sells computer hardware and peripherals, grew from around $ 37 billion to around $ 46 billion over the same period. The publicly listed VMWare Subsidiary that sells software and services for cloud computing and virtualization has also increased sales to some extent.
- Apple, on the other hand, benefited from soaring sales of digital services like Apple Music and iCloud and wearable products like AirPods and the Apple Watch, although sales of its flagship iPhone product remained lackluster. (Connected: Apple sales: What is big and what has changed?)
2. Returns (profits)
In terms of returns, Dell’s net income margin is around 6%, while Apple is a symbol of profitability with a net income margin of over 20%. Apple’s profits are also likely more predictable, considering that its product and service ecosystem helps keep users engaged. In comparison, Dell plays in more standardized markets where competition is fierce. However, Apple’s returns have been flat or declining in recent years, while Dell’s return metrics have improved. In addition, it is possible that the company could increase its margins in the future through higher software-related sales.
- Dell’s operating cash flow margin was around 10% in fiscal 2020, up from 4.2% in fiscal 2016. In contrast, the metric for Apple in 2019 was 27%, versus around 31% in fiscal 2016.
- Dell’s return on invested capital – that’s net income divided by total equity and total debt – was about 8% for fiscal 20, compared to Apple’s ROIC of about 21%.
While Apple is very well capitalized with an incredible $ 190 billion stacks of cash, Dell’s numbers are less reassuring given its massive debt load of over $ 50 billion.
- Specifically, Dell’s debt level – that is, its total long and short term debt to market capitalization ratio – based on current market capitalization and debt for the second quarter of FY21 is about 110%. Apple, which has increased its debt in recent years by taking advantage of low interest rates, has a debt ratio of just under 6%.
- Apple had more than $ 190 billion in cash at the end of the last quarter, with a cash to total assets ratio of about 60%. By comparison, Dell’s liquidity position last quarter was approximately $ 12 billion, with a cash-to-total assets ratio of about 10%.
However, we believe Dell is generating enough cash flows to pay off its debt, with free cash flow (operating cash flow minus capital expenditures) around $ 7 billion last fiscal year. Additionally, with around $ 12 billion in cash, the company should be able to comfortably meet its payments.
The web of everything
Overall, we think Dell is a more attractive stock relative to Apple in current valuations. Apple’s P / S has increased from 3.7x in 2017 to around 7.5x, while Dell’s has decreased to 0.6x. Sure, Dell has significantly more leverage and its business and corporate structure may not be as easy to understand for investors, but the valuations look attractive. Dell’s improved ROI and efforts to combine hardware sales with its cloud-centric software to drive growth are significant benefits. In addition, the company is considering spinning off its approximately 81% stake in VMWare in order to unlock significant value. VMWare has a market cap of over $ 60 billion, which means Dell’s stake is valued at $ 50 billion. That’s roughly on par with Dell’s current market cap, which means investors could get the rest of the deal essentially for free.
What if you’re looking for a more balanced portfolio instead? Here is a high quality portfolio to beat the market, with a return of over 100% since 2016, versus less than 50% for the S&P 500. Consisting of companies with strong sales growth, healthy profits, lots of cash and low risk, it has consistently outperformed the broader market year after year.