Dell Technologies Inc.

Moat: 2.5/5

Understandability: 2/5

Balance Sheet Health: 4/5

Dell Technologies is a global technology company that designs, develops, manufactures, markets, sells, and supports a wide range of comprehensive and integrated solutions, including hybrid and multi cloud infrastructure, AI and Data Management, Client Devices (laptops, desktops), and software and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Dell’s business is complex and spans different segments. To assess its moat, we need to analyze each segment’s competitive dynamics and long-term prospects. While there is no true moat on the company as a whole, the different business units have different moat profiles.

Business Overview

Dell Technologies operates across two primary segments: Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG). They are both crucial for the business, with ISG focusing on IT infrastructure and CSG focusing on client devices.

  • Infrastructure Solutions Group (ISG): This segment provides products and solutions in areas such as servers, networking, storage, and data protection. It caters to IT infrastructure needs of businesses.
  • Revenues for this segment were $8.3 billion in the last quarter, up by about 3% year over year. In the full fiscal year of 2023, ISG generated around $34 billion in revenue.

The growth is driven primarily by networking, AI and accelerated computing, and infrastructure compute.

  • Client Solutions Group (CSG): This segment offers a range of computing devices like laptops, desktops, and workstations.
    • The revenue for this segment was $12 billion in the last quarter, up 11% year over year. The full fiscal year of 2023 generated around $52 Billion.

The growth was driven by both commercial and consumer client units, but growth for the commercial side was stronger.

Competitive Landscape

Dell operates in a highly competitive industry. Here is the information from various reports and their comments:

  • Infrastructure Solutions (ISG) The market for data center IT infrastructure is very competitive, and includes companies such as HPE, IBM, and many others in the market. Many companies are transitioning from a on-premise storage option to a cloud-based data storage.
  • Client Solutions (CSG) The PC market is very competitive, with HP, Lenovo, and Apple being the main players.

Both markets are dominated by very strong competitors and commoditized products. This makes establishing a wide moat very tough.

Financial Analysis

The company has shown strong growth, especially in terms of revenues. Here is what I have found out:

  • Revenue Growth: Dell’s revenue in fiscal year 2023 totaled $102.3 billion, showing an increase of 6% from fiscal year 2022. This shows good top-line growth for the company. In the last quarter alone, the company grew revenues by 6%.

Growth drivers were robust across all areas in CSG and ISG segments.

  • Gross Profit: The gross profit for the fiscal year 2023 was $21.7 billion, a healthy 21.3% of revenues, up from 20.5% last year.
  • Operating Expenses: The company is consistently spending around 14% of the revenues on operating expenses. The operating profit for the year stands at $5.1 billion.
  • Cash Flow: Cash flow from operations was $7.5 billion for 2023.

The strength in operational cash flow provides plenty of capital allocation opportunities to the company.

  • Profitability: Net income for the full year is $2.4 billion. The company expects EPS between $1.25-$1.40 for the full year, but for now the management has suspended full-year earnings projections due to market conditions.

The company does have a considerable debt of around $24 billion. It also spent $5.2 billion on share repurchases in 2023. The debt and share repurchases could be points of contention for investors.

Moat Rating: 2.5/5

Dell has some strengths, such as a global reach, a broad customer base, and a history of innovation. But it has many significant weaknesses in moat creation that include:

  • Low Switching Costs: For consumer-oriented businesses, especially, the products it sells can be changed relatively easily if there are better options.
  • Intense Competition: Both the ISG and CSG segments have several very strong players like Microsoft, Apple, HPE, and Lenovo. Many players provide highly competitive products. The increased competitive intensity is a big threat to the company.
  • Technology Risk: Technology is fast-evolving. A new technology breakthrough could easily make some of the products offered obsolete, quickly eroding whatever competitive advantages it has built over the years.

The company has some structural advantages based on its supply chain and scale, but those are not enough to provide it with an enduring moat, hence it gets a rating of 2.5 out of 5.

Risks to the Moat and Business Resilience

Here are the risks that the company faces and what management is doing to tackle them.

  • Macroeconomic Factors: Due to the global macroeconomic downturn, the demand for IT and PC products has gone down, which causes problems in the supply chain. Dell expects the weak demand to continue for some time, while there is no clear timeline of improvement.

The management expects an improvement in the second half of 2024.

  • Supply Chain Constraints: Component constraints have been impacting companies globally, and Dell also has been affected. To offset this risk, Dell is developing its own supply chain capabilities, including building strong ties with suppliers, and focusing on supply chain diversification. They are building multi-source strategies, in which a single supplier does not dominate.

They are also building inventories in places which are less sensitive to macro issues and supply chain bottlenecks.

  • FX volatility: Strong dollar has caused a decline in revenue when seen in local currencies. Dell uses currency hedges to reduce the impact of the changes in currency exchange rates, but they can only do this much and no more.

Dell is trying to diversify into more markets so that this impact would be lessened.

  • Market Share Instability: The market is unstable, and the company cannot rest on its laurels. Competitors are constantly trying to steal market share with new and better products at more attractive prices. The company is actively innovating and launching new, competitive products to stay ahead of competitors.

They are also focusing on building brand loyalty so that they can retain customers.

  • Recession and Bankruptcy: The company is seeing lower profitability, which might lead to recession and bankruptcy. Dell is reducing the debt on its balance sheets and trying to keep operations lean, to weather any possible downturn in the economy.

The management is confident that the long-term fundamentals remain strong.

  • Customer Spending: Customers are hesitant to spend money. The company is implementing many financing options so that customers will continue to buy from them.

Understandability Rating: 2/5

Dell’s business model and its financial reports are not easy to understand. There are several aspects that makes it complicated. For instance:

  • Complex Operations: The company works across multiple segments and geographies, each with its own set of rules, complexities, and requirements, making the overall picture quite difficult to comprehend.
  • Accounting Nuances: Dell’s accounts show many different kinds of adjustments-for example, amortization and share-based compensation. To analyze the company, the effects of these elements on various metrics need to be taken into account.
  • Evolving Business: Dell is not a single, stable company, but is constantly moving around and trying to improve by innovating and changing its approach. This adds to the complexity of analysis, because previous trends might not apply going forward.

Due to these aspects of the company, it is difficult to comprehend everything clearly. Thus, it gets a rating of 2 out of 5.

Balance Sheet Health: 4/5

Dell has an adequate amount of liquidity and a good track record of profitability, that gives it stability. The following are the analysis behind the decision:

  • Debt Repayment: Dell is consistently repaying its debt. The company is now approaching its 15 percent debt to total capital target.
  • Strong Cash Flow: There is positive cash flow from operations, which can be used to pay off its liabilities. It also provides some cushion if the company needs money for new investments, or to withstand a possible recession.
  • Share Repurchases: The company is actively trying to improve shareholder returns through share repurchases. This is one of the better ways to return cash to shareholders.

Even with these repurchases, the company has been able to keep its debt under check.

  • Reserves: There are sufficient reserves on the balance sheet.
  • High Short-Term Liabilities: Though the company has some long-term debt, it is not something too troubling. More than half the liabilities are short-term, but with strong operations they are very manageable.

On balance, the company has a strong balance sheet. Thus it gets a balance sheet rating of 4 out of 5.