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Dell: Too Cheap To Ignore


Parsad
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Good article (clear, simple to understand),

 

I'm lazy, or too busy.. so if someone could help me.  How much will Dell earned on these 3 business (ES, services, and software segments) in 2013? This could help understand the risk involved in the scenario layed down in the artile for 2017.

 

Also operating incone is not net profit as everyone knows.

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Guest valueInv

Here's another analysis of Dell using the same theory...assume the PC business is worthless, and do a valuation estimate!  Cheers!

 

http://seekingalpha.com/article/897521-dell-too-cheap-to-ignore?source=yahoo

 

Two questions:

 

1, Assuming the PC business is worthless. Based on the latest investor presentation, Dell predicts about $27.5B in ES&S revenue in 2016 :

http://i.dell.com/sites/content/corporate/secure/en/Documents/Consolidated_Deck_web_final.pdf

 

Assuming a 10% growth rate, you have $30B in ES&S revenue in 2017, not $41B. At 13% operating margins, you have $3.9B in

operating income in 2017.

 

Now that is assuming a 10% growth rate (including Dell's promised numbers). If you were to give yourself a margin of safety and assume a 7.5% growth rate, you end up with $27B in 2017 ES&S revenue and not $30B. Shouldn't we be using $3.5B in 2017 operating income?

 

I'm guessing the discrepancy is because people are including EUC driven revenue (software and peripherals, pc support services) in ES&S?

 

2, For the D+M business he assumes 22% gross margins in 2017. How reasonable is this? If unit sales are dropping and there is over capacity in the industry, shouldn't GMs drop even faster?

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It is difficult concerning Dell to calculate enterprise value (market cap less net cash) because cash is the product of negative working capital. If the business decreases then cash decreases too)

So comparing EV to operating income is misleading.

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  • 1 month later...

http://www.marketwatch.com/story/dell-upgraded-to-buy-from-sell-at-goldman-sachs-2012-12-03-6914653?siteid=yhoof2

 

Goldman analysts said their bullish view is based on three factors: sentiment and expectations could begin to tilt positively in 2013; a 28% drop from peak in consensus expectations for fiscal 2014 has produced a positive risk/reward for the stock; and the "downside buffer" provided by Dell's net cash balance. Goldman raised its 12-month target price to $13 from $9.
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Despite the seemingly large cash balance (which is really not so large after excluding debt), how do you guys get comfortable with the management's capital allocation decisions?

 

It seems like the evidence points to:

- Poor timing of buy backs (more at the peak, less at the trough)

- Issuing dividends instead of purchasing shares

- Expensive acquisitions and lack of transparency on acquisition performance (especially given the recent Autonomy debacle at HP)

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This is what scares me about Dell: http://www.wired.com/wiredenterprise/2012/11/amazon-google-secret-servers/

 

The big guys Amazon, Google, Microsoft, FB are all building their own servers and selling time on them to the little guys.  Where does this leave Dell?  It leaves them out.  If you are already writing off the retail PC business as unprofitable this should be a big concern.  Here are the relevant quotes from the article:

 

" Amazon buys its server processors and memory directly from Intel, doing an end-run around middle men such as HP and Dell and other original equipment manufacturers, or OEMs."

 

"The result is an enormous shadow market for servers and other data-center hardware that’s hidden from those who traditionally track hardware sales. Google goes straight to Asia. So does Facebook. And according to a former Quanta employee who spoke to Wired earlier this year, even Microsoft is purchasing data-center hardware straight from Asian companies that the average American has never heard of."

 

"In short, the hardware landscape is changing in a big way. Earlier this year, Diane Bryant, the head of Intel’s data center group, told us that eight server makers now account for 75 percent of Intel’s server chip revenues — and one of those is Google. Just four years ago, three companies made up that 75 percent: Dell, HP, and IBM."

 

"Amazon Web Services were remarkably cheap from the very beginning, and the prices continue to drop. This week, at its first AWS conference in Las Vegas, Amazon announced a 25 percent price cut on S3, its online storage service. Amazon is running its web operation in much the same way it runs its famous retail business. Ultimately, EC2 is just selling a commodity. So many others can sell the same thing. In order to make it work, you have to operate on very low financial margins. “Amazon, from our retail upbringings, has this background and this comfort and this skill in running high-volume, low-margin businesses,”"

 

"Google and Amazon are giving the world an even easier — and cheaper — way of running their operations without the likes of HP and Dell. They provide virtual servers you can use from any web browser."

 

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This is what scares me about Dell: http://www.wired.com/wiredenterprise/2012/11/amazon-google-secret-servers/

 

The big guys Amazon, Google, Microsoft, FB are all building their own servers and selling time on them to the little guys.  Where does this leave Dell?  It leaves them out.  If you are already writing off the retail PC business as unprofitable this should be a big concern.  Here are the relevant quotes from the article:

 

" Amazon buys its server processors and memory directly from Intel, doing an end-run around middle men such as HP and Dell and other original equipment manufacturers, or OEMs."

 

"The result is an enormous shadow market for servers and other data-center hardware that’s hidden from those who traditionally track hardware sales. Google goes straight to Asia. So does Facebook. And according to a former Quanta employee who spoke to Wired earlier this year, even Microsoft is purchasing data-center hardware straight from Asian companies that the average American has never heard of."

 

"In short, the hardware landscape is changing in a big way. Earlier this year, Diane Bryant, the head of Intel’s data center group, told us that eight server makers now account for 75 percent of Intel’s server chip revenues — and one of those is Google. Just four years ago, three companies made up that 75 percent: Dell, HP, and IBM."

 

"Amazon Web Services were remarkably cheap from the very beginning, and the prices continue to drop. This week, at its first AWS conference in Las Vegas, Amazon announced a 25 percent price cut on S3, its online storage service. Amazon is running its web operation in much the same way it runs its famous retail business. Ultimately, EC2 is just selling a commodity. So many others can sell the same thing. In order to make it work, you have to operate on very low financial margins. “Amazon, from our retail upbringings, has this background and this comfort and this skill in running high-volume, low-margin businesses,”"

 

"Google and Amazon are giving the world an even easier — and cheaper — way of running their operations without the likes of HP and Dell. They provide virtual servers you can use from any web browser."

 

This is absolutely something DELL investors should be aware of, and it has been pointed out in the past on the board that DELL itself is quite aware of this competitive threat. 

 

Now, talking about the data center, the data center solutions I talked about are clearly quite different than the database solutions that you're bringing up, which is some very large service -- I'm just explaining your question -- some very large service providers are sophisticated enough that they want to bring the components down to the very base level buy the most inexpensive components, and they'll do all the integration, in essence, themselves. And there are some ODMs that are competing for various components in those, and quite successfully.

 

Dell also competes in that business. We have actually a very large business in providing a very integrated set of solutions. So, for the companies that don't want to invest in all their own integration and engineers to do that, we have the ability to integrate not only the very low cost server elements, but also the networking, power, cooling, storage, into, in essence, a very large infrastructure that we can deliver, in essence, as a data center in a carrier, and we can drop that on people's roofs, and have, or we can put it in a field. And in a very short period of time it, in essence, is a data center.

 

So, our offering is very different from what some of the ODMs are offering, which is very low cost piece parts, but you must integrate it and build the data center on your own to we have a very low cost and efficient integrated data center offering that we can drop and really shorten the time to deployment. Again, our strategy is all about ease of use and time to deployment. And so we are very consistent on those themes. So, our implementation dramatically cuts down on all of the effort that the customer needs to do in order to implement our solutions. So, we have a very different strategy there.

 

Now, I also would like to explain that many companies must decide which applications they want on and off premise for the reasons I articulated before, whether it's security, regulation, performance, whatever the reason is, many customers, if not most, are going to live in a hybrid world where they run some applications on premise, and some applications off premise in some form of a public cloud, let's say.

 

But once you've made that determination that you've got to have some applications in your environment. There are all sorts of advantages for a company like Dell that is a developer and distributor of those core components, because we'll be able to burst to a comparable environment. So, that will allow customers to operate their data center at average workloads versus peak workloads as long as they know the infrastructure on the public cloud side is comparable to the private cloud side. Then that provides all kinds of flexibility for them, which a traditional public cloud can never provide, because they can't mimic the exact environment they'll have on premise.

 

So, again, a different strategy, but one that clearly in that space also advantages our unique capabilities. So, whether or not it's in the purveyor of data centers that lends itself to our capability to fully integrate, or whether it's a public-private cloud hybrid, it plays to our ability to provide a comprehensive set of software, hardware and solutions that represent the next generation of converged infrastructure.

 

http://i.dell.com/sites/doccontent/corporate/secure/en/Documents/2012_09_CLSA_Transcript_Web.pdf

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Yes, some small percentage of companies are always going to want their own servers and won't want to build and maintain them themselves, this will be especially true in the short to medium term as many won't trust the cloud at first.  But I think this is a business that will soon find itself in decline.

 

You have large companies that will build and maintain their own stuff as they are starting to do now.  For the ones that don't there will be some who (like Netflix) run entirely in the cloud and some who will be potential customers of Dell.

 

Then you have mid-sized businesses who will find the cloud more and more attractive from a cost standpoint as Amazon and Google fight a price war for this commodity service.  The number of these businesses who buy and maintain their own data-centers will decline as time goes on I think.

 

Then you have small-sized businesses who will almost certainly take advantage of the cost savings of the cloud. 

 

Finally you have government, which doesn't need to worry about cost or being efficient in any way, so maybe Dell can hold on to these sales as well.

 

I don't see Dell's business having a lot of room to grow long term.  I of course could be wrong, but it will stop me from buying.  I already own some DELL though my ownership in Fairfax, that is more than enough DELL exposure for me.

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I agree that earnings growth in this biz line could stall.  Maybe even start to decline at some point.

 

But I think it's overly optimistic to say that everything will be outsourced to major cloud vendors and that there won't be growth in sales over the long run.  There will always be a need for private cloud hardware, and while I see public cloud taking a much bigger share of the pie for the foreseeable future, I think the pie is expanding such that there is still a runway for volume growth of ready to deploy solutions (think hospitals, utilities, government agencies, etc.). 

 

In any case, I'm not so worried about a flattening of growth in cloud hardware sales for DELL because my focus is really more on ES&S revenue growth generally, which includes cloud hardware (not to mention client hardware).

 

Obviously, we disagree on gov't.  ;)

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