Dell (DELL) is in a tough spot. Although the company still has good market share in areas like enterprise storage and servers, those markets have seen fierce competition whittle down margins, and so too in the PC business, where the company is a somewhat more distant runner-up to Lenovo (OTCPK:LNVGY) and HP (HPQ). Spinning off VMware (VMW), which the company has acknowledged it is considering, would no doubt unlock some near-term value, but it would also take away a key growth software asset (and a big chunk of free cash flow) from a company that doesn’t otherwise have a particularly strong presence in software.
Dell does look undervalued as is, assuming low single-digit long-term revenue growth and mid single-digit free cash flow margins, and again that VMW spin could unlock more value. Still, investors should realize that mature tech hardware is a tough place to generate long-term alpha and set their expectations accordingly.
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