Dell's Strategic Shift to Cloud Lifts Stock Outlook

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

Over the past month, Dell has announced plans to acquire three smaller cloud-service companies - Compellent Technologies, Inc., Insite One, Inc. and SecureWorks Inc. These acquisitions expand Dell's enterprise-class storage solutions, global IT-as-a-Service offerings and information security expertise. Dell previously missed out on a large cloud opportunity when it lost the bid for 3Par to HP (See HP Emerges as Victor Over Dell in Battle for 3Par ).

We maintain a $19.25 price estimate for Dell's stock , well above market price. Below we discuss why the cloud opportunity is attractive to PC makers, and highlight the potential upside to Dell.


1. Cloud to Drive Growth in Data Storage

Cloud and virtualized environments offer greater utilization of resources, cost advantages, scalability and ease of use. These advantages have attracted increasing attention from a wide array of organizations and, accordingly, storage virtualization (part of virtualized infrastructure) has witnessed tremendous growth. We anticipate this trend will continue for the foreseeable future, with storage virtualization accounting for a substantial portion of storage demand in the years ahead.

To capitalize on this trend, Dell entered into a $960 million agreement to acquire Compellent, a provider of highly-virtualized storage solutions with automated data management features for enterprise and cloud-computing environments. We believe this move will enable Dell to better compete with other virtualized storage providers like EMC ( EMC ), NetApp (NTAP) and HP that have made similar acquisitions.

2. Cloud Provides a Hedge Against Slowing Demand for Hardware

We previously discussed Dell's increasing shift to service operations (See Dell's Consulting & Services - 13% of Stock Value and Growing ). This shift has occurred alongside declining market share for Dell in hardware products (including PCs & servers). The hardware market overall has experienced a slowdown in growth due to heightened competition from newer devices (like tablets). On the other hand, services offer more reliable revenue streams and can be leveraged by firms like Dell that already have established relationships with large organizations.

Dell's recent acquisitions represent another strategic shift, as cloud-based services are widely perceived as a game-changing opportunity for businesses. More importantly, since these initiatives follow a service model, they allow firms to generate recurring subscription/maintenance revenues. This is particularly attractive to Dell as it competes with giants like HP and IBM for high-value enterprise customers.

You can drag the trend line in the chart above to see the impact of various storage share scenarios on Dell's stock value.

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Our complete analysis of Dell's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , DELL , EMC , HPQ , IBM

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