Dell Explores Sale or Spin-Off of Its Stake in VMware

In today’s pre-market trading session at 7:33 AM ET, Dell Technologies (NASDAQ:DELL) and VMware (NYSE:VMW) stocks rose by 14.7% and 8.3%, respectively. The stocks rose on reports that Dell is examining options for its nearly $50 billion stake in VMware. Dell owns 81% of the enterprise software company. Notably, the company can’t do a tax-free spin-off its VMware stake until September 2021.

According to a Fox Business report, “Dell recently kicked off a process to explore the possibility of unloading the stake in the cloud-software giant or taking other steps that could include buying the rest of VMware.” The report also said, “The goal of the review is to address a gap between Dell’s market value of roughly $36 billion and the value of its 81 percent stake in VMware, which suggests the market is assigning little or no value to Dell’s core PC and data-storage business. Separating the companies could help highlight the value of one or both businesses.”

Dell might not do anything since the talks are in an early stage. Dell and VMware didn’t comment on the matter.

Dell’s growth projections

On a reported basis, Dell posted an EPS of $0.19 in the first quarter of fiscal 2021 (quarter ended May 1) compared to an EPS of $0.38 in the first quarter of fiscal 2020. Excluding the net special items, the company posted an adjusted EPS of $1.34 in the first quarter compared to an adjusted EPS of $1.45 in the same period last year. The adjusted EPS beat Wall Street’s expectation of $0.92 for the first quarter of fiscal 2021. Dell’s first-quarter revenue fell 0.2% YoY (year-over-year) to $21.9 billion. The revenue beat analysts’ estimate of $20.8 billion.

For the second quarter, Wall Street analysts expect a 4.1% fall in the revenue to $22.5 billion from $23.5 billion in the second quarter of fiscal 2020. For fiscal 2021, analysts expect a 2.9% fall in the revenue to $89.8 billion from $92.5 billion in fiscal 2020. Analysts also hope that the fiscal 2022 sales will rise to $91.9 billion.

Analysts hope that the second-quarter adjusted EPS will be lower at $1.36 compared to $2.15 in the second quarter of fiscal 2020. For fiscal 2021, the adjusted EPS could decline to $5.67 from $7.35 in fiscal 2020. Analysts expect that the fiscal 2022 adjusted EPS will rise to $6.69.

Analysts’ recommendations and target price

Among the 17 analysts tracking Dell stock, nine recommend a “hold” and eight recommend a “buy.” None of the analysts recommend a “sell.” The consensus target price of $55.94 per share implies an upside of 14.1% based on Dell’s closing price of $49.01 on Tuesday. The consensus target price for the stock has risen from $48.47 in May—a growth of 15.4%.

According to a report from TheFly, Mizuho analyst Gregg Moskowitz said that he has “highlighted VMware’s unique ownership structure as an overhang to valuation. As such, the prospect of the company becoming a more traditional public entity could be welcomed by many investors…However, with Dell’s review reportedly at a very early stage, investors should approach this news with some caution.”

Stock returns

Dell stock rose 1.5% on Tuesday and ended the day at $49.01. At this closing price, the company’s market cap is $36.3 billion. Notably, the stock is trading 17.2% below its 52-week high of $59.17 and 92.1% above its 52-week low of $25.51. On a year-to-date basis, the stock has fallen by 4.6% as of Tuesday.

Based on the closing price on Tuesday, Dell stock was trading 1.2% above its 20-day moving average of $48.42. The stock is also trading 10.5% above its 50-day moving average of $44.34 and 12.7% above its 100-day moving average of $43.49. With a 14-day relative strength index score of 59, the stock isn’t overbought or oversold.

Dell has an upper Bollinger Band level of $51.54, while its lower Bollinger Band level is $45.29. On Tuesday, Dell stock closed near its middle Bollinger Band level of $48.42, which indicates that the stock is neutral.

On Tuesday, Intel (NASDAQ:INTC) and HP (NYSE:HPQ) returned -0.3% and 0.5%, respectively. Meanwhile, the S&P 500 and the Dow Jones Industrial Average returned 0.43% and 0.50%, respectively.

To learn more, read Why Dell Stock Deserves a Place in Your Portfolio.