Description

CDW Corp is no stranger to VICers, it has been written up three times (2005,

2014, 2021), the last time was on 2021-12-05 at $128/share. CDW Corp has very

high ROIC (60%+), but is trading cheaply (P/E about 18) because of the "going

cloud" secular bear thesis (and maybe some others like software companies going

DTC, etc). I believe CDW can deliver high-teens return over the next 5 years

because it's the dominant player, a "grower" in a "maybe-no-growth" industry

that is not going to go away.

CDW is a value-added reseller (a.k.a. VAR see this wikipedia page

    https://en.wikipedia.org/wiki/Value-added_reseller)

of IT products for SMB in US, UK, Canada. It has a broad array of offerings

ranges from discrete hardware and software products to integrated IT solutions

and services that include on-premise and cloud capabilities across hybrid

infrastructure, digital experience and security. CDW plays the role of a middle-man

in the IT ecosystem; it procures products from OEMs, software publishers, cloud

providers and wholesale distributors, then re-sell to customers with "added value".

Customers need CDW to help them navigate through a huge selection of IT vendors,

find and implement the best solutions for their businesses. IT vendors need CDW

to reach customers. This is a two-sided market. CDW's business model is vendor,

customer, technology "agnostic"; it's just doing a middle-man's job where a

middle-man is needed. CDW is offering value to both sides:

To customers:

(1): Broad selection of products and multi-branded IT solutions.

(2): Value-added services with integration capabilities. CDW has highly skilled

     specialists and engineers to help select and implement IT solutions, and

     also help maintain and upgrade across IT lifecycles. This is critical for

     SMB because their in house IT teams are usually terrible or simply

     non-existent.

To IT vendors:

(1): Large and established customer channels; access to over 250K customers.

(2): Strong distribution and implementation capabilities; customer relationship

     driving insight into technology roadmaps.

room for growth

CDW is very diversified. It provides integrated IT solutions in more than 150

countries for customers with primary locations in US, UK, Canada, which are

large and growing markets. Also, the total addressible market is much larger

than CDW's current annual revenue. According to the International Data Corporation,

the total US, UK and Canada IT market generated about $1.4T sales in 2022. CDW

management believes that out of this $1.4T, CDW's TAM is about $460B. CDW's 2022

annual revenue $23.7B is only about 5% of this, so there is plenty of room to

grow. This is a highly fragmented market served by thousands of IT resellers and

solution providers. CDW is the dominant player in this market, it's 3x larger than

the next largest competitor. CDW has delivered consistent, faster than market

growth over the past two decades. Demand for IT solutions likely will continue

to outpace general GDP growth in CDW's TAM, fueled by new technologies, including

hybrid and cloud computing, virtualization and mobility as well as growing

end-user demand for security, efficiency and productivity. Even if the TAM is not

growing or shrinking (due to recession), CDW can still grow by grabbing market

share from smaller players.

These slides are from the company's own investor presentation, you can find the

original slides here:

https://s23.q4cdn.com/113947819/files/doc_presentations/2023/5-CDW-Investor_Deck-2023-vF-8-1-23.pdf

diversified in customers

About 90% of revenue comes from US business; which currently has 5 customer

channels: corporate (private sector business with >= 250 employees), small

business (<= 250 employees), government, education, healthcare; each of which

generated >= $1.9B in sales in 2022. Net sales to customers in UK, Canada combined

generated about $2.9B in 2022.

diversified in IT vendors

CDW provides more than 100K products and services from more than 100 IT vendors;

including both large, well established companies like Apple, Google, Microsoft,

etc, and also many small emerging technology companies. 2022 annual sales was

$23.7B, while each of the five largest vendor partners contributed about $1.5B.

CDW is adaptive

It's interesting to compare CDW's two 10-K filings five years apart, from 2017 and

from 2022; the services listed in the "Our Offerings" section has changed quite

a bit:

FY ended 2017-12-31

(1): Data Center

(2): Digital Workspace

(3): Security

(4): Virtualization

(5): Services

FY ended 2022-12-31

(1): Services

(2): Hybrid Infrastructure: Assess customers application infra need, design

     flexible, resilient and efficient solutions and manage the solution throughout

     its lifecycle. CDW's broad portfolio of hardware / software products, both

     on and off-premise, enables it to provide well-integrated solutions.

(3): Digital Experience

(4): Security

You can see that the "Data Center" item is gone, and everything else is more in

the "hybrid" mode (on premise OR cloud) now. This is consistent with CDW's core

strategy of being technology agnostic. CDW is in the business of being a

middle-man in a two-sided market; it's not just selling hardware / software

(although the company was started in the 1980s just selling hardwares), its job

is managing customer channels for vendors and providing IT solutions for customers.

Customers / vendors need companies like CDW because doing this thing themselves

is a lot more expensive than using CDW. CDW has very significant scale advantage,

which allows it to get more favorable pricing from vendors, and offer more choices

to customers. CDW is working hard to maintain and widen this scale advantage.

In addition to regular dividend and share buybacks, CDW also opportunistically

do M&A to broaden its customer reach. THe most recent acquisition of Sirius

Computer Solutions, completed on December 1 2021, has greatly enhanced CDW's

services and solutions capabilities in key areas, including hybrid infrastructure,

security, digital and data innovation, and cloud and managed services, as well

as added services scale, further balancing and diversifying the portfolio mix.

The important thing in this acquisition (and many previous ones) to CDW is the

acquisition of customers. It's by ever expanding its customer base (instead of

up-selling to existing customers) that CDW keeps its moat.

VAR industry is about low tech savviness of SMB

This scale advantage is clearly reflected in financial metrics.

(1): Per employee revenue is 40%+ more than publicly traded competitors.

(2): EBIT/Revenue about 8% for many years, which is much higher than smaller

     competitors.

This is a consolidating industry where smaller players are gradually eaten up by

scale players like CDW. No large scale capital will enter the industry to compete

with CDW. Also, this industry is not going away, or at least not going

away too soon, because:

(1): From the customer side, if you need hand holding when selecting and

     installing software/hardware, you won't miraculously be able to DIY just

     because things are on cloud.

(2): From the vendor side, the situation is symmetric. You don't need CDW to

     reach the tech-savvy customers to begin with. CDW helps you sell to

     technology-challanged customers; they won't become CS experts overnight.

Therefore, as long as the general technology proficiency level at SMB, government

agencies, etc, stay where they are, or at least not improving too quickly, the

VAR industry will stay.

There's nothing thrilling about a thrilling high-growth industry, except watching

the stocks go down. ... That's because for every single product in a hot industry,

there are a thousand MIT graduates trying to figure out how to make it cheaper in

Taiwan. ... In a no-growth industry, especially one that's boring and upsets

people, there is no problem with competition. You don't have to protect your

flanks from potential rivals because nobody else is going to be interested. This

gives you the leeway to continue to growth, to gain market share. ...

------ Peter Lynch in "One Up on Wall Street"

I think CDW fits pretty well to the Peter Lynch "grower in a no-growth industry"

profile quoted above. To recap:

1. CDW is high ROIC, reasonable P/E.

2. CDW has room to grow for many years to come. It's the dominant player with

   scale advantage, with only 5% market share in a highly fragmented industry

   that is growing steadily and is in the consolidating stage.

3. The secular bear thesis for the VAR industry is wrong. It's NOT about going

   cloud so that only giant companies will ever buy hardwares again, NOT about

   software companies going DTC to get rid of middle-men like CDW. Instead, most

   importantly, value-added-resellers have reason to exist as long as technology

   proficiency at SMB, government agencies, schools, etc, don't improve too

   quickly; which I believe is true.

Catalyst

1. growth of technology spending

2. tech savviness  of SMB, government agencies, don't improve too quickly

3. time