/Dell%20Technologies%20by%20Poetra_RH%20via%20Shutterstock.jpg)
Dell Technologies (DELL) stock has been falling but Dell generated strong free cash flow last quarter. Is it time to buy? One strategy to lower the buy-in target is to sell short cash-secured out-of-the-money puts in nearby expiry periods.
DELL is at $108.19 in midday trading on Tuesday, Jan. 14. This is well off its recent high of $138.92 on Nov. 21. It has dropped 22% in the past two months.
Could it have further to fall, if analysts and the market don't like its upcoming earnings results? Maybe, but don't forget - it still produced positive Q3 free cash flow (FCF), although significantly lower than its prior year.
FCF Estimates
For example, the table below shows that its Q3 FCF margin was still positive at almost 3.0%, albeit lower than last year.
Nevertheless, analysts still project higher revenue next year. For example, 23 analysts surveyed by Seeking Alpha project sales for the year ending Jan. 31, 2025, will be $96.25 billion. For Jan. 2026, the average estimate is 8.1% higher at $104.09 billion.
Therefore, if Dell makes at least a 3.50% FCF margin this year, it could generate $3.64 billion in FCF (i.e., $104b x 0.035).
That implies, using a 5.0% FCF yield metric, it could be worth $72.8 billion in market value (i.e., $3.64/0.035).
This is slightly lower than its present market value of $75.3 billion. It implies the stock is worth 3.3% less than today's price, or $104.62.
So, you can see, it all depends on how strong its FCF margins will be going forward.
For example, if the company can start generating 6.00% or higher FCF margins as it did last year (see above), the stock could have a dramatic turnaround.
Analysts Have Higher Targets
Analysts seem to have hope that Dell Technologies can pull off higher FCF margins. That might provide some upside for DELL stock.
For example, Yahoo! Finance reports that the average price target is now $151.51. That is up from the $147.06 that I reported in my Oct. 27 Barchart article.
Nevertheless, AnaChart's survey is more conservative. It shows that 18 analysts who have written recently on DELL have a lower $124.73 price target.
Let's assume that it may take some time for DELL stock to turn around, especially if Q4 earnings and FCF margins come in lower than expected. What is the best way to play this?
Selling short out-of-the-money (OTM) put options in nearby expiry periods is a conservative way to play this.
Shorting OTM Puts for Income and a Lower Price Target
For example, look at the Feb 14, 2025, expiration period, 31 days to expiry (DTE). It shows that an investor at a significantly lower buy-in price can make a good income.
The $100.00 put strike price (i.e., 7% or more today's price) has a bid-side premium of $2.09 per put contract.
That means that the short-seller of these puts can make an immediate yield of 2.09% (i.e., $2.09/$100.00).
This means that an investor who secures $10,000 (i.e., 100 shares per contract x $100 strike price) can enter an order to “Sell to Open” 1 put contract at this strike price.
The account will then immediately receive $209.00. Hence, the 2.09% yield ($209/$10,000 invested).
This allows the investor who shorts these puts to also set a much lower buy-in target price, in case DELL stock falls to $100.00 on or before Feb.14. In that case, the investor actually has a lower breakeven price, since $100-$2.09 already received, is $97.91 per share, or 9.5% below today's trading price.
Moreover, that allows the investor to have a good potential upside. That would still provide a 6.85% upside if DELL stock falls to my $104.62 price target (if its FCF margins in Q4 don't improve).
The bottom line is the investors can set a lower buy-in target price this way and still get paid while waiting.
