Debt, Ownership Questions Add Uncertainty for Dell

Mark Cash: We recently initiated coverage of Dell Technologies with a fair value estimate of $56 per share, and we view this no-moat, stable moat-trend name as slightly undervalued. However, we assigned a very high uncertainty rating to the company due to its substantial debt load and concentrated ownership profile.

Made up of eight brands, including an 81% ownership stake in narrow-moat VMware, Dell Technologies offers products that cover the entire IT infrastructure ecosystem. We expect a gradual slowdown in the PC market to force Dell Technologies to rely on growth elsewhere. In our view, the company is well-positioned to execute on rapidly growing trends like flash-based storage, hyperconverged infrastructure, and software-defined networking.

We believe Dell Technologies has substantial cross-selling and upselling opportunities across its brands, which could increase switching costs over time. In the marketplace, we are seeing Dell EMC hardware paired with VMware software alongside solutions like Dell Technologies' cloud-based software platforms being offered together. We are fans of these collaborative efforts and expect this trend to continue.

Lastly, investors should understand that Dell Technologies has a sizable debt balance. While we believe the company should cover its immediate debts, there is potential that the company misses out on the next big thing due to its obligations. Also, shareholders are largely beholden to Michael Dell's strategic vision, and past Dell deals may not have always been for the public shareholder's best interest.

With that said, we believe the company has a sound strategy for the changing IT infrastructure landscape and that Dell Technologies will be a key cog in the world of hybrid-cloud IT ecosystems.