Please ensure Javascript is enabled for purposes of website accessibility

Why Dell Stock Soared Today

By Evan Niu, CFA – Jul 16, 2020 at 1:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The PC maker might sell off its stake in VMWare, which is worth more than Dell itself.

What happened

Shares of Dell (DELL -3.12%) have soared today, up by 14% as of 12:10 p.m. EDT, after the company announced yesterday evening that it was exploring the idea of selling its majority stake in virtualization specialist VMWare (VMW -1.58%). A potential divestiture could unlock massive value for Dell shareholders.

So what

Rumors have been swirling in recent months that Dell has been examining what to do with its 81% stake in VMWare, with possible outcomes including a spinoff or buying the remaining 19% of the company. Dell is now exploring the former option while noting that it could choose to simply maintain its current ownership interest in VMWare.

Dell booth at CES 2020

Image source: Dell.

Dell emphasizes that it would still want to maintain a mutually beneficial commercial relationship with VMWare should a spinoff occur. A divestiture could help simplify both companies' capital structures while creating substantial enterprise value. Another goal would be to keep VMWare's investment grade credit rating while improving Dell's credit rating to investment grade territory. Moody's said today that a potential spinoff would increase uncertainty for both companies.

Now what

Incredibly, the value of Dell's stake in VMWare ($48 billion) is greater than Dell's entire market cap ($44 billion), even after today's jump. In other words, the market is effectively assigning a negative value to Dell's actual operations of selling PCs and other computing hardware. Dell was the No. 3 PC vendor in the second quarter, according to IDC.

If Dell and VMWare decide to move forward with a spinoff, it would occur in September 2021 or later and Dell would seek to get the deal to qualify as tax-free for federal income tax purposes.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool recommends VMware. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
$34.19 (-3.12%) $-1.10
VMware, Inc. Stock Quote
VMware, Inc.
$107.48 (-1.58%) $-1.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.