Dell Technologies (NYSE: DELL), a provider of computing products and storage solutions, trades at just about 0.6x trailing Revenues, compared to Apple (NASDAQ: AAPL) which trades at 7.5x trailing Revenue. Does this make sense? While Dell is one of the dominant players in the enterprise IT and cloud space, the company’s valuation is depressed considering its high debt, exposure to relatively commoditized and highly competitive markets, and a relatively complex corporate structure following years of deal-making that included a delisting, a large acquisition, and a re-listing. Apple, on the other hand, has seen its valuation soar in recent quarters, as investors see the stock as a safe haven of sorts through Covid-19, while anticipating a Revenue bump from the upcoming 5G iPhones. However, let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical Revenue 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. Revenue Growth
Dell’s Revenues of about $92 billion in FY’20 are roughly one-third of Apple’s Revenues. Apple’s revenues over the last four quarters were $274 billion. That said, Dell’s growth has been higher than Apple’s over the last three years driven partly by the acquisitions of EMC (which closed in mid FY’17). Revenue expanding at an average rate of 14% per year (from $62.2 billion in FY’17 to $92 billion in FY’20), versus about 6% for Apple.
- Dell’s growth was driven by the Infrastructure Solutions business, which sells storage solutions and servers. Revenues for the segment expanded from $22 billion in FY’17 to about $34 billion in FY’20, driven partly by acquisitions. The Client Solutions segment that sells computer hardware and peripherals grew from about $37 billion to around $46 billion over the same period. The publicly listed VMWare subsidiary – which sells cloud computing and virtualization software and services – has also driven sales to a certain extent.
- Apple, on the other hand, has benefited from expanding revenues from digital services such as Apple Music and iCloud and wearable products such as AirPods and the Apple Watch, although sales of its flagship product, the iPhone, has remained lackluster. (Related: Apple Revenue: What’s Big & What’s Changed?)
2. Returns (Profits)
Coming to Returns, Dell’s Net Income Margins stand at about 6%, while Apple, with Net Income Margins exceeding 20%, is an icon of profitability. Apple’s profits are also likely more predictable, considering that its product and services ecosystem helps to lock in users. In comparison, Dell plays in more commoditized markets where competition is fierce. However, Apple’s returns have remained flat or declined, over the last few years, while Dell’s Return metrics have been improving. Further, it’s possible that the company could expand margins going forward, via higher software-related sales.
- Dell’s Operating Cash Flow margins stood at about 10% in FY’2020, up from 4.2% in FY’2016. In contrast, the metric stood at 27% for Apple in 2019, down from around 31% in FY’16.
- Dell’s Return on Invested Capital – which is Net Income divided by total Equity and Debt – was about 8% in FY’20, compared to Apple’s ROIC of about 21%.
While Apple is very well-capitalized with an incredible cash pile in excess of $190 billion, Dell’s metrics are less comforting considering its massive debt load of over $50 billion.
- Specifically, Dell’s Debt to Equity – which is the ratio of total Long and Short-term Debt to Market Cap – stands at about 110% based on its current market cap and Q2 FY’21 debt. Apple, which has bolstered its debt in recent years taking advantage of low-interest rates, has a Debt to Equity ratio of just about 6%.
- Apple had over $190 billion in cash at the end of its most recent quarter, with a Cash to Total Assets ratio of about 60%. In comparison, Dell’s cash position stood at about $12 billion in the most recent quarter, with a Cash to Total Assets ratio of about 10%.
However, we think that Dell is generating sufficient cash flows to pay its debt, with Free Cash Flow (Operating Cash Flow Less Capital Expenditure) standing at about $7 billion over the last fiscal year. Moreover, with a cash cushion of about $12 billion, the company should be able to comfortably meet its payments.
The Net Of It All
Overall, we think that Dell looks like a more attractive stock at current valuations, compared to Apple. Apple’s P/S has risen from 3.7x in 2017 to about 7.5x currently, while Dell’s has declined to 0.6x. Sure, Dell has significantly more leverage, and its business and corporate structure probably aren’t as straightforward for investors to understand, but valuations are looking attractive. Dell’s improving returns and moves to combine hardware sales with its cloud-centric software to drive growth are significant positives. Moreover, the company is mulling a spin-off of its roughly 81% ownership in VMWare in a move that could unlock significant value. VMWare has a market cap of over $60 billion, meaning that Dell’s stake is valued at $50 billion. That’s roughly in line with Dell’s current market cap, meaning that investors could essentially be getting the rest of the business for free.
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