Don’t Buy Dell’s DVMT Stock To Get VMWare at a Discount

Despite reporting high earnings and revenue growth, DVMT stock is too burdened by uncertainty

By Will Healy, InvestorPlace Contributor

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Source: Dell

Dell Technologies Inc (NYSE:DVMT) reported impressive growth in both revenue and earnings. This sent DVMT stock up modestly in trading after the market opened. However, DVMT maintains an interesting position since it serves as a tracking stock for one company while reporting its financials to the public despite holding a private distinction since 2013.

However, with Dell’s financial challenges, as well as the future of DVMT stock as a tracker in question, I would avoid this stock as long as uncertainty remains.

Dell Reported Strong Numbers

Dell reported $22.2 billion in non-GAAP revenue for 4Q 2018, up 8% from 4Q 2017. Operating income came in at $2.1 billion, up 15% year-over-year. For the full fiscal year, the company reported $79.9 billion in revenue which produced $6.9 billion in income.

This stock maintains a strange distinction. The above results represent Dell as a whole. However, Dell actually remains private, at least for now. After having traded for several years, Dell went private in 2013. However, when the company acquired EMC Corporation in 2015, agreed to resume disclosing its financials to the public.

One other consequence of acquiring EMC was that EMC owned a majority stake in VMWare, Inc. (NYSE:VMW). Hence, the company distributed DVMT stock to EMC shareholders in 2016 to track the stake in VMWare.

DVMT Stock Trades at a Discount

Hence, since then DVMT has functioned as a tracking stock that allowed the public to see Dell’s financial results. Now, Dell is currently considering a “reverse merger” where it takes over the rest of VMWare and resumes its existence as a public company. If that occurs, DVMT stock will no longer trade.

As I reported recently, VMW stock has performed well. It fell after the earnings announcement last week. The stock has already recovered those losses, however. And it’s also stood as a strong performer. The stock has nearly tripled in value from its 2016 lows.

Interestingly, DVMT stock has not performed as well, despite being the same company. Since September 2016 when Dell introduced the tracking stock, the stock price has risen by about 59%. In the same timeframe, VWW stock increased by 67%.

Both have outperformed peers such as Microsoft Corporation (NASDAQ:MSFT), Cisco Systems, Inc. (NASDAQ:CSCO), and Hewlett Packard Enterprise Co (NYSE:HPE) in the same period. If I wanted to invest in VMWare, I would prefer DMVT stock over VMW as the majority stake trades at a discount.

Tying VMWare to Dell Hurts DVMT Stock

VMWare remains a vibrant, high-growth company with a compelling product line and a strong balance sheet.

Unfortunately, the same cannot be said for its majority owner.

Acquiring EMC left Dell with a heavy debt burden. Currently, Dell holds almost $44 billion in long-term debt and just under $15 billion in stockholders’ equity. Dell can easily service the debt with its cash on hand. However, the situation also limits Dell’s ability to take on additional debt. Acquiring the remaining portion of VMWare would make that liability grow more.

Still, Dell did not grow from being a dorm room-based operation to a multinational corporation by making stupid decisions. If Dell were to choose to spin off VMWare, I would love DVMT stock (if it were still to exist) as a company separate from Dell.

As things stand now, stay away.

Bottom Line for DVMT Stock

DVMT stock tracks a secure entity in VMWare.

Unfortunately, with both its existence and its status as part of Dell in question, I would avoid this stock.

As a company, Dell reported strong growth. However, its massive debt burden poses a threat to its tracker stock. While as a tracker it trades at a discount to VMW stock, the question of Dell’s role looms too large.

As long as its future and its financial situation remain in limbo, investors would be better-served by position in other equities.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/dont-buy-dvmt-stock-buy-vmware-discount/.

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