Welcome to the last day of 2018!
For most of us, it’s been quite the bumpy ride.
For instance, last year I predicted that the video game sector would have a banner year in 2018, singling out Activision Blizzard, Nintendo and Sony. It was a 50/50 situation.
Activision Blizzard Inc. (Nasdaq: ATVI) put in strong performances through October before the “loot box” fiasco took hold.
I still believe in ATVI stock as a long-term investment … with a caveat. Investors will want to wait for the legalities of loot boxes to be settled before diving in or adding to their current holdings.
As for Nintendo Co. (OTC: NTDOY), the hype for its Switch gaming console peaked early in 2018 for the markets.
As a result, NTDOY stock steadily waned throughout the year. It may take another console generation before Nintendo sees 2017 hype levels again.
However, Sony Corp. (NYSE: SNE) remained a solid investment throughout the year.
Given the budding hype surrounding the next-generation PlayStation console and Sony’s virtual reality plans, you should probably hold on to SNE stock regardless of how the market turns.
Turning our attention to 2019, we are looking at more market uncertainty that could make it hard to live up to all those “Happy New Year!” declarations.
As I’ve said before, a defensive posture is a must.
But that doesn’t mean there won’t be bullish opportunities … they’ll just be harder to find.
Luckily, by listening to the gurus here at Banyan Hill, you already have a leg up in that department.
Today, I’m going to suggest a “dark horse” for a potential bullish opportunity for 2019 … though, it may take a while for this position to fully develop.
The Return of Dell Technologies
If you were burned by technology stocks this year, you’re probably groaning at your screen right now.
“Not another tech stock!”
But Dell Technologies Inc. (NYSE: DELL) is different from all those momentum and FAANG stocks.
It missed the irrational exuberance that drove the tech sector to unsustainable heights in 2017 and 2018.
Why? Because until Friday, December 28, Dell was a private company.
I won’t go into the messy details. But back in 2013 Dell went private as part of its deal to acquire EMC — the parent company of cloud virtualization company VMware Inc. (NYSE: VMW).
Earlier this December, Dell offered $23.9 billion in cash and stock to buy back the holding shares created when the company went private. The deal even won approval from hard-line investor Carl Icahn, who had initially opposed taking Dell public again.
Dell returns to Wall Street with a controlling interest in a powerhouse of technology companies: Cloud software virtualization company VMware; Cloud platform integration specialist Pivotal Software Inc. (NYSE: PVTL); and cybersecurity specialist SecureWorks Corp. (Nasdaq: SCWX).
It’s a veritable smorgasbord of cloud-computing technology. Dell provides the hardware, VMware provides the tools and access, Pivotal provides the cloud platform for business access and SecureWorks locks everything down nice and tight.
A Market-Share Juggernaut
This quadrumvirate of companies already has a proven track record for success. Just before shareholders voted to take the company public again, Dell announced its quarterly results, with total revenue rising 15% to $22.48 billion.
What’s more impressive is that Dell’s share of the server market rose to 17.5%, up 33.3% from the prior quarter. Dell’s leading competitor, Hewlett Packard Enterprise Co. (NYSE: HPE) came in at 16.3% market share and growth of 14.8%.
Putting the market-share figures into perspective, data firm IDC reports that revenue from the global server market rose 37.7% year-over-year in the same quarter. In other words, Dell is not only gaining market share on its chief rival, it’s pacing global growth in the server market.
Banking on this data, JPMorgan Chase analyst Paul Coster set an “overweight” rating and a $60 price target on DELL stock when the shares started trading.
“The firm has reported 23 consecutive quarters of share gain in the PC market, and Dell is a leader in many infrastructure product categories, including storage, x86 servers, external storage arrays, hyper-converged infrastructure, client technology and server virtualization,” Coster wrote.
The Hitch in Dell’s Outlook
There are two caveats to investing in Dell right now.
The first is that the shares are “new” again to Wall Street. As such, it will take a bit of time to get comfortable.
DELL won’t be as volatile as a new initial public offering. But the shares will still need a bit of a breaking-in period to see what valuation the market will bear.
The second caveat is that Dell is carrying $53 billion in debt.
With interest rates rising, corporate debt could be a major concern as the costs to finance it rise and eat into earnings. Here, too, we will want to wait to see how the market will price this debt into DELL stock.
With that said, cloud computing is still gaining momentum. Market leaders Microsoft Azure and Amazon Web Services (AWS) continue to show significant quarterly growth. (By the way, VMware tightened its business relationship with AWS just before Dell went public again last week.)
Cloud computing is key to driving massive growth in the Internet of Things market that my colleague Paul Mampilly speaks so highly of. As I’ve shown above, Dell is not only a major player in this market, it is expanding at a respectable pace.
So, once DELL stock settles in a bit and establishes a trend, you should seriously consider adding the shares to your portfolio.
Having missed the hype that pushed tech stock valuations to untenable levels, DELL may be one of the few bright spots in the sector for 2019.
Until next time, good trading!
Assistant Managing Editor, Banyan Hill Publishing