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Why Dell Technologies Rose 10.4% in August

By Billy Duberstein – Sep 9, 2020 at 8:55AM

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The tech conglomerate reported better-than-expected earnings during the month, and investors may also be looking toward a value-add catalyst next year.

What happened

Shares of Dell Technologies (DELL 2.89%) rose 10.4% during the month of August, according to data from S&P Global Market Intelligence. The technology conglomerate, whose offerings span servers, computers, and software, posted better-than-expected results on Aug. 27. Shares may have also benefited from comments earlier in the summer regarding a possible spinoff of the company's VMware (VMW 0.55%) stake in the future.

So what

For its second quarter, Dell delivered revenue of $22.8 billion, which was actually down 2.8% year over year, but still some $300 million ahead of analyst expectations in the pandemic-affected quarter. Meanwhile, thanks to cost controls  and lower marketing expense during the uncertain time, adjusted earnings per share grew to $1.92, beating expectations by $0.52.

Closeup of video conference going on on a laptop screen.

Image source: Getty Images.

Although Dell's infrastructure group, which includes servers, networking, and storage, saw profits fall 7%, and its client solutions group, which includes both commercial PCs and consumer notebooks, saw profits fall 27%, Dell's high-margin VMware virtualization software subsidiary grew 10%, with profit growth up 19%.

Now what

Speaking of VMware, Dell had confirmed in July that it was exploring a potential spinoff of its 81% stake in VMware. Currently, the value of Dell's stake in VMware, the other 19% of which is publicly traded, is worth nearly as much as Dell's entire equity value. Therefore, a spinoff could perhaps unlock hidden value for Dell's assets outside of VMware.

Such a move likely wouldn't happen until late 2021, when it becomes tax-free to do so. Still, each month closer to that date may bid up shares of this large-cap tech stock as investors anticipate the spin-off happening. On the other hand, management has stressed that the move isn't automatic, and discussions are in their early stages.

Billy Duberstein owns shares of Dell Technologies Inc and has the following options: short October 2020 $52.50 puts on Dell Technologies Inc. and short September 2020 $60 puts on Dell Technologies Inc. His clients may own shares of the companies mentioned. The Motley Fool recommends VMware. The Motley Fool has a disclosure policy.

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