Are investors underestimating Dell Technologies Inc. (NYSE:DELL) 34%?

Important insights

Dell Technologies’ forecast fair value is $168 USD based on two-stage free cash flow.

This article estimates the intrinsic value of Dell Technologies Inc. (NYSE: DELL) by collecting expected future cash flows and discounting today’s value. For this purpose, we utilize the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually very easy!

I point out that DCF is not the best for any situation, as companies can be valued in many ways. For those of you who are avid stock analysis learners, the Simply Wall St analysis model here may be of interest to you.

Check out the latest analysis from Dell Technologies

Model

It uses something called a two-stage model. This means that our cash flow has two different periods of growth. Generally, the first stage is higher growth, while the second stage is lower growth. First, you need to estimate your cash flow over the next decade. If possible, use analyst estimates, but if these are not available, extrapolate the previous free cash flow (FCF) from the last estimate or reported value. Companies with reduced free cash flow expect to slow down their contraction rates, while companies with growing free cash flow will likely see their growth rates drop during this period. To reflect this, growth reflects that childhood growth tends to be slower than later.

Generally, we assume that today’s dollars are worth more than future dollars, so the sum of these future cash flows is discounted to today’s value.

10 Years of Free Cash Flow (FCF) Estimates

2025202620272028202920303120322034 FCF ($,$4.36BUS$6.33BUS$7.82BUS$7.91BUS$8.04BUS$8.19US$8.37BUS$8.57BUS X8ANTISE st x7analyst x1analyst x1est @1.58%est @1.93%est @2.17%est @2.35%EST @2.47%

(“est”=FCF growth rate is simply estimated by wall ST)
Present value of 10-year cash flow (PVCF) = USD 47 billion

Now we need to calculate the terminal value that will account for all future cash flows after the last decade. For many reasons, highly conservative growth rates are used and cannot exceed the country’s GDP growth rate. In this case, we estimated future growth using a 5-year average of 10-year government bond yields (2.8%). Just like a 10-year “growth” period, we use 8.5% equity costs to discount future cash flows to today’s value.

Terminal Value (TV) = FCF2034×(1 + g) ÷(r – g) = US $8.8b×(1 + 2.8%) ÷(8.5% – 2.8%) = US $158B

Current value of terminal value (PVTV) = TV /(1 + R) 10 = US $158B ÷ (1 + 8.5%) 10 = US $70B

The total value is the total cash flow and discount terminal value for the next 10 years, in this case the total stock value of USD 117 billion. The final step is to divide the stock value by the number of shares outstanding. The current stock price appears to be very undervalued at where the stock is currently trading and at a 34% discount compared to US$110. However, don’t forget that this is just a rough assessment and like a complicated formula, there is garbage trash.

Assumption

Currently, the most important inputs to discounted cash flow are discount rates and of course actual cash flow. Part of your investment is devising your own assessment of the company’s future performance, so try your own calculations and check your assumptions. DCF also does not provide a complete picture of the potential performance of a company, as it does not take into account the circularity of the industry or the future capital requirements of the company. Given that we are considering Dell Technologies as a potential shareholder, capital costs are used as discount rates rather than capital costs (or weighted average cost of capital, WACC) that account for the debt. This calculation used 8.5% based on a lever beta of 1.320. The beta version is a measure of stock volatility compared to the overall market. It takes betas from the industry average beta of globally comparable companies, with a limit between 0.8 and 2.0. This is a reasonable scope of stable business.

Dell Technologies SWOT Analysis

Next steps:

While company ratings are important, they are not the only indicators you look at when researching a company. The DCF model is everything, not everything, of investment valuation. If possible, you can apply various cases and assumptions and see how this will affect your company’s valuation. For example, if the terminal value growth rate is slightly adjusted, it could dramatically alter the overall outcome. Why is its intrinsic value higher than the current stock price? We’ve put together three more items for Dell Technologies.

Risk: For example, consider the ever-present spectors of investment risk. We have identified two warning signs using Dell Technologies. Understanding them must be part of the investment process. Management: Have insiders increased their stocks to capitalize on market sentiment towards Dell’s future outlook? Get insight into CEO compensation and governance factors and view our management and board analysis. Other solid businesses: Low debt, high returns on equities, and good past performance are fundamental to strong business. Why not explore an interactive list of stocks with solid business foundations to see if there are other companies that don’t take into consideration?

Poem Simply Wall ST updates DCF calculations for all American stocks daily. So, if you want to find the intrinsic value of other inventory, search here.

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This article simply by Wall Street is inherently common. We provide commentary based on historical data and analyst forecasts, and use impartial methodologies, and our articles are not intended for financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or financial situation. We aim to deliver long-term intensive analysis driven by basic data. Please note that the analysis may not take into account the latest price-sensitive company announcements and qualitative material. Simply put, the Wall ST has no position in the stock mentioned.