Don’t Follow Goldman Sachs on Its Dell Rescue Mission

by Tom Taulli | December 3, 2012 12:19 pm

Long-term Dell (NASDAQ:DELL[1]) shareholders have been subjected to abject torture for years, with stats like a five-year average loss of 17% or a 2012 year-to-date loss of 30% ringing painfully in their ears.

So it was no small amount of relief when Goldman Sachs (NYSE:GS[2]) jumped in with a sweet, soothing tune.

Goldman analyst Bill Shope just upgraded DELL shares[3] from a “sell” to a “buy” and raised his price target from $9 to $13, which would be a roughly 35% improvement from Dell’s Friday closing price of $9.64.

Part of the bullishness stems from Shope’s belief that the horrible news for Dell specifically (and PCs more broadly) has already been baked into the company’s valuation — for example, when stripping out the $5.15 billion in net cash, the stock is trading at only 3 times EBITDA.

That wouldn’t be surprising; Wall Street apparently has sensed this in a number of tech stocks as of late, and stocks like Dell and Advanced Micro Devices (NYSE:AMD[4]) have recently bounced back, including huge respective rallies of 6% and 10% so far today.

All that said, investors shouldn’t buy the hope.

A depressed valuation isn’t a guarantee of a rebound — those poor multiples can linger for years if there’s no opportunity or expectation for growth.

And that’s the case with Dell. The company’s products are commoditized, and Dell is feeling pricing pressures from lower-cost operators out of Asia. More broadly speaking, the PC market as a whole is in secular decline — according to a recent report from Barclays (NYSE:BCS[5]) analyst Ben Reitzes, the market will drop by 3% in 2012 and 4% in 2013, and he believes the declines will continue “for years to come.[6]”

That’s not a bad bet, considering that growth has shifted to mobile devices and tablets — a market where Dell’s footprint is all but nonexistent. When you think laptops, for instance, you think Dell. When it comes to tablets, however, Dell isn’t even in the conversation. You think of Apple (NASDAQ:AAPL[7]) and its iPad or (NASDAQ:AMZN[8]) and its Kindle Fire … or you think of the host of Samsung and other tablets powered by Android, Google‘s (NASDAQ:GOOG[9]) operating system.

That’s not to imply there’s no hope for Dell. Just that there’s not much.

For instance, Dell could pull off a leveraged buyout; given its cash flows, that kind of deal would be doable. And by being a private company, Dell might have more leeway to take tough restructuring actions — a potentially attractive option to company CEO and Founder Michael Dell, who owns about 14% of the outstanding shares.

That said, buying in hopes of a buyout is akin to gambling.

Dell yields an attractive 3.3%, so it might make a slow decline less painful, but the point is a decline is coming. Dell’s future still looks as grim as the lagging PC market to which it’s tethered.

So despite Goldman’s recommendation, stay away from Dell.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[10], a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook[11]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[12].”  Follow him on Twitter at @ttaulli[13]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. DELL:
  2. GS:
  3. Bill Shope just upgraded DELL shares:
  4. AMD:
  5. BCS:
  6. “for years to come.:
  7. AAPL:
  8. AMZN:
  9. GOOG:
  10. IPOPlaybook:
  11. How to Create the Next Facebook:
  12. High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders:
  13. @ttaulli:

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