Should Dell Focus its Net Cash Position on Investment in Tablet Technology?

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DELL: Dell logo
DELL
Dell

Dell (NASDAQ:DELL) competes with personal computer manufacturers like HP (NYSE:HPQ), Apple (NASDAQ:AAPL), Acer (TPE:2353) and Toshiba, and increasingly against IBM (NYSE:IBM) and others for IT services.

Dell currently has a net cash balance of about $8 billion; we estimate that this net cash position represents nearly 22% of Dell’s stock value, which is notably higher than for most competitors like HP, Intel (NASDAQ:INTC) and even Apple.

HP has a net debt of $4.7 billion (or $2 per share). Similarly, Intel’s net cash balance of $7 billion (or 4.4% of company value) is also lower than Dell’s. While Apple’s net cash balance at $60 billion is way beyond Dell’s $8 billion in absolute terms, its contribution to Apple value (estimated at 15%) is relatively lower than for Dell.

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We currently have a $19.25 price estimate for Dell’s stock, well ahead of market value.

What Can Dell Do with its Substantial Net Cash Position?

Dell is already showing continued strength in PC shipments (see Dells Continued Strength In PC Shipments Could Raise Stock Outlook). However, the PC market in general is under threat of increasing tablet popularity. With a flurry of media tablets lined up for launch in 2011, the PC shipments could take a hit as consumers opt for the new products.

Apple has had considerable success with the iPad, and HP is working on an innovative cloud-based tablet to provide the ultimate cloud experience. With a lot of research going on in both the tablet and cloud computing space, it seems that personal computing is heading for a big shift where all computing will be handled in the cloud and the device (tablet or other) will just be a terminal. This might spell doom for PC manufacturers like Dell and HP, which derive a significant portion of their company value from the PC segment, if they do not make a swift move into the tablet market. [1]

If Dell’s global notebook & netbook shipments decline during our forecast period, vs. our base forecast of a substantial uptick, there could be significant downside to our $19.25 price estimate for Dell’s stock.

Drag the trend line in the modifiable chart above to see the affect of various global notebook and netbook shipment forecasts on Dell’s stock value.

Should Dell Invest More in New Tablet Technology?

The big question that arises now is whether Dell should invest more resources into the new tablet technology? The answer, we believe, is a definitive Y-E-S.

While some might think that Dell is off to a slow start compared to some its competitors in the tablet market, the technology is only at its beginning and has great potential for further development and refinement as the cloud offering increases. The opportunity for further tablet penetration into the mass market is the primary reason why Dell should increase its focus on this market.

Dell should channel more resources into the tablet technology before it’s too late. With a significant net cash balance, Dell is in an excellent position and more than capable technologically to aggressively pursue large upsidei n the tablet market. According to our estimates, the iPad alone is currently worth $29 billion to Apple, representing about 7% of company value.

Dell Expanding Cloud Offering

Dell, which recently announced plans to acquire cloud-service companies like Compellent Technologies, Inc., Insite One, Inc. and SecureWorks Inc, is already building up its cloud offerings. With the cloud expected to change the way applications are delivered and services are consumed, this is a step forward for Dell. (See Dells Strategic Shift to Cloud Lifts Stock Outlook)

As tablets are projected as “the device” to make possible the widespread implementation and use of cloud technology (due in part to portability), it seems strategically appropriate for Dell to launch a competitive device for the tablet market that will better enable users to access and utilize its cloud services more efficiently.

See our complete analysis of Dell’s stock here.

Notes:
  1. HPs Cloudbased Tablet Could Change The World, PCWorld.com []