Barron’s on Dell

Jay Palmer looks at Dell (DELL).

The problem for Dell is that, in the U.S. market, Dell’s not the problem. Corporate PC sales, which account for maybe 85% of demand, continue to grow, at an unexciting pace. On the consumer side, Dell’s unit sales continue to grow at a slightly faster clip than the market as a whole, which according to both IDC and Gartner is rising at around 11% a year. But for over a year now, the biggest and fastest growing sector has been basic PCs that list at $300 to $400. Though Dell’s super-efficient direct-sales business model allows it to make money where many others can’t, at ever-decreasing prices, revenue growth is slow and the profit can be measured in pennies. In short, while Dell may be selling more, it is earning less revenue and less profit from each one.
Unit and revenue growth overseas is better, about 17% in terms of units worldwide, according to industry watchers, but here Dell isn’t faring well. In the hottest markets, China and India, buyers prefer to play with a machine before buying. Few are used to buying over the phone or Internet, leaving Dell at a competitive disadvantage to rivals like HP and Lenovo, which mostly sell through retail chains.
“The PC business is no longer a growth market, for Dell or for anyone else, and it never again will be,” says John Enck of the Gartner Group. “There is no conceivable way that Dell can significantly outgrow the market as a whole and there is no way that the company can ever return its growth to the high levels of yesteryear.”
Dell would dispute that, but clearly market trends are seriously inhibiting its ability to boost growth. One much-touted solution, of course, was the company’s big push into servers and consumer products, like printers, flat-screen TVs and MP3 music players. All play to company strengths and, if you talk to Dell Chief Executive Kevin Rollins, you’ll get an earful on the big potential. Even so, given signs HP is making a comeback in servers and the ongoing low margins in big-ticket consumer electronics, the jury is still out.
At the stock’s current price, there are still more than a few die-hard fans. They argue that if there was ever a company capable of masterminding a return to growth, it’s Dell. That’s probably true, but it’s no longer enough. If Dell’s revenue fails to grow faster, and certainly if the company continues to miss earnings targets, it will be time to admit that Dell is past its best.

Posted by on November 6th, 2005 at 11:56 am


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