Dell Technologies (NYSE: DELL) reported its second-quarter results last week. The big takeaway from the results was that there is definitely more to Dell than its 80% stake in VMWare (NYSE: VMW). This is important when you consider that its VMware stake is worth more than Dells’s own market cap.

VMware’s results which were released the previous week were a reality check for the stock which has arguably been in bubble territory in recent months. While many analysts are calling Dell a no-brainer at current levels, the stock price will be capped if VMW continues lower.


Dell Bucks Tech Spending Slowdown

Dell’s bottom-line growth was well ahead of estimates. GAAP EPS at $4.83 were $5.10 above estimates and well ahead of the $0.65 loss recorded a year ago. Revenue of $23.4 billion was slightly higher than estimates and 1.4% higher for the year.

The results went a long way to mitigate some of the common concerns surrounding Dell. Debt has been reduced from $48 billion when EMC was acquired to $36 billion. In addition, the company has $10 billion in cash and investments and is generating enough cash flow to continue to reduce its debt load. This will strengthen the balance sheet and reduce borrowing costs.

Dell’s enterprise business managed to buck the weakness other tech businesses are experiencing. While Dell’s enterprise revenue was only 1% higher for the quarter, many competitors saw sales decline.


VMware Begins to Slow

Dell’s most valuable asset is VMWare, which has seen its stock price fall as much as 36% since May. The company beat revenue and earnings estimates, but the stock fell a further 10% as growth slowed and analysts became more cautious.

VMware is particularly well-positioned for on-site and hybrid cloud solutions. It has also recently bought Pivotal Software and Carbon Black, which will broaden the range of solutions VMW can offer clients. VMW is a favourite stock in the cloud space but may have run too hard earlier in the year.

Also, revenue and earnings growth at VMW are slowing. The forward earnings multiple of 19 is a little on the rich side if growth stays below 10%. The company’s recent purchases and strategy suggest growth should reaccelerate – exactly when is difficult to estimate given the uncertain environment.


Dell’s Sum of the Parts

With all the uncertainty in the tech market, the key here is VMW’s chart. $130 is a key level, and if VMW falls below that, Dell’s stock price will be capped.

Dell’s market cap of around $40 billion is the same as the value of its 80% stake in VMware. In addition, Dell carries $36 billion in debt, which suggests that is the market’s approximate value for the remainder of Dell.

This seems very low when you consider the remainder of Dell generates revenue of over $80 billion. If VMware is fairly valued, then the remainder of Dell’s businesses are a bargain. The possibility of value being unlocked through an unbundling adds even more upside to the story.

The risk is whether or not VMware trades lower before it can start growing earnings again. With all the uncertainty in the tech market, the key here is VMW’s chart. $130 is a key level, and if VMW falls below that, Dell’s stock price will be capped.

That said, another successful retest of $130 will offer an excellent reward to risk opportunity for either stock, though there is more value to be unlocked in Dell.

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