Dell Technologies Inc. (DELL) just confirmed that it's exploring a spin-off of majority-held VMware, Inc. (VMW), lifting Dell stock to a 14-month high while VMware sold off. The divergence makes sense because the parent has little to lose in the transaction and much to gain, while the child is already fully valued. The company indicated that spin-off discussions are currently in the exploration phase but the initial reaction on Wall Street has been highly positive.
Dell stock underperformed badly after the December 2018 initial public offering (IPO), spending the majority of the past 19 months trading below the $46 IPO opening print. This laggard behavior has encouraged market players to wonder why Michael Dell chose to abandon the privately held status after removing the company from the Nasdaq 100 in 2013. The founder must have wondered the same thing, with rumors about a sale swirling just two months after the offering.
Dell currently holds an 81% stake in VMWare, which is valued more than the parent. Cowen analyst Krish Sankar raised his price target on Dell stock to $63 from $60 on Friday morning, noting that the transaction could occur as early as September 2021, adding, "we estimate core Dell could be valued at $31 and the VMW stub at $64." However, he warns that "unlocking this value depends on negotiating an agreement between both companies and a special dividend for deleveraging."
Dell Technologies Daily Chart (2018 – 2020)
The stock sold off into the low $40s after the December 2018 offering and turned higher, breaking out to a new high in February 2019. Steady buying interest stalled in the upper $60s in May, ahead of an all-time high print at $70.55 a few weeks later. Aggressive sellers then took control of the ticker tape, dropping the stock into the IPO opening print in August. A modest uptick failed in the mid-$50s in September, completing a trading range that held intact into a February 2020 breakdown.
The steep decline posted an all-time low at $25.51 in March, ahead of a vertical buying impulse that initially stalled at broken range support in April. Positive price action finally remounted that level in June, at the same time it gapped above the 200-day exponential moving average (EMA). This week's buying spike lifted just above July 2019 range resistance before reversing into the close on Thursday evening. The stock is trading lower on Friday, reinforcing resistance in the upper $50s.
Dell Technologies Outlook
The on-balance volume (OBV) accumulation-distribution indicator topped out in May 2019 and failed September and November breakout attempts. OBV finally cleared that barrier in June 2020, lifting to an all-time high while raising the odds that price will eventually follow. A pullback to the red line should offer a buying opportunity in this scenario, perhaps taking place at the same time as a pullback to the narrowly aligned 50- and 200-day EMAs.
A Fibonacci grid stretched across the May 2019 into March 2020 downtrend reveals that price has been stair-stepping harmonic levels since March, reversing at the .786 retracement level on Thursday. Unfortunately for recent buyers, a turnaround at this level often prints a high or low that goes unchallenged for weeks or months, raising the odds for a pullback in coming weeks. Sidelined investors won't complain if that happens, using the decline to "buy the dip" at major support.
The Bottom Line
Dell Technologies stock has lifted to the highest high since May 2019 after confirming talks about a VMWare spin-off.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.