Dell Technologies shares fell by -1.6% during the day's afternoon session, and are now trading at a price of $55.59. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
Dell Technologies's Valuation Is in Line With Its Sector Averages:
Dell Technologies Inc. designs, develops, manufactures, markets, sells, and supports various comprehensive and integrated solutions, products, and services in the Americas, Europe, the Middle East, Asia, and internationally. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 27.16. In contrast, Dell Technologies has a trailing 12 month P/E ratio of 20.9 based on its earnings per share of $2.66.
There is an important limit on the usefulness of P/E ratios. Since the P/E ratio is the share price divided by earnings per share, the ratio is determined partially by market sentiment on the stock. Sometimes a negative sentiment translates to a lower market price and therefore a lower P/E ratio -- and there might be good reasons for this negative sentiment.
One of the main reasons not to blindly invest in a company with a low P/E ratio is that it might have low growth expectations. Low growth correlates with low stock performance, so it's useful to factor growth into the valuation process. One of the easiest ways to do this is to divide the company's P/E ratio by its expected growth rate, which results in the price to earnings growth, or PEG ratio.
Dell Technologies's PEG ratio is -6.35, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
The Business Has Weak Operating Margins:
| 2019-03-29 | 2020-03-27 | 2021-03-26 | 2022-03-24 | |
|---|---|---|---|---|
| Revenue (MM) | $90,621 | $84,815 | $86,670 | $101,197 |
| Gross Margins | 28.0% | 24.0% | 23.0% | 22.0% |
| Operating Margins | 0% | 3% | 4% | 5% |
| Net Margins | -3.0% | 5.0% | 4.0% | 5.0% |
| Net Income (MM) | -$2,310 | $4,616 | $3,250 | $5,563 |
| Earnings Per Share | -$5.88 | $3.1 | $2.16 | $7.25 |
| EPS Growth | n/a | 152.72% | -30.32% | 235.65% |
| Diluted Shares (MM) | 393 | 1,490 | 1,507 | 767 |
| Free Cash Flow (MM) | $8,488 | $11,867 | $13,489 | $13,103 |
| Capital Expenditures (MM) | -$1,497 | -$2,576 | -$2,082 | -$2,796 |
| Net Current Assets (MM) | -$75,428 | -$78,209 | -$71,823 | -$49,282 |
| Long Term Debt (MM) | $49,201 | $44,319 | $32,865 | $21,131 |
| Net Debt / EBITDA | 5.8 | 5.02 | 3.27 | 1.9 |
Dell Technologies has slimmer gross margins than its peers, weak operating margins with a positive growth rate, and a highly leveraged balance sheet. On the other hand, the company has positive EPS growth working in its favor. Furthermore, Dell Technologies has weak revenue growth and a flat capital expenditure trend and irregular cash flows.
