Selections from
Fortune
Monday, August 4, 1997
THE HOTTEST STOCK ON WALL STREET MOVE OVER, MICROSOFT: DELL COMPUTER'S STOCK
HAS JUMPED 500% IN 12 MONTHS. WHO EVER SAID SOFTWARE WAS THE WAY TO PLAY TECH?
ANDREW E. SERWER
. . .
So now the questions is, Will Dell climb even higher, or is it too
late to get in? With all that appreciation, the stock's
price/earnings multiple has greatly expanded, though not to the
dramatic heights you might expect--from about 13 a year ago to a
hardly stratospheric 27 today. What's more, the company's earnings
are expected to increase by more than 60% this year. On the other
hand, Dell's success has drawn the attention of competitors like
Compaq and IBM, which recently announced plans to cut their PC
prices, and in Compaq's case, to switch partly to a direct sales
model in imitation of Dell.
. . .
Servers now account for 6% of sales, up from 3% a year ago.
The laptop troubles seem to have been solved, with portables now
accounting for 20% of Dell's $10 billion in total revenues. And
direct selling is working abroad: According to technology research
firm IDC, Dell's global market share ranking has risen from No. 8
last year to No. 3, behind Compaq and IBM, thanks in large part to a
now booming foreign business. (In contrast, Apple Computer, whose CEO
Gil Amelio recently resigned, has dropped from No. 4 a year ago to
No. 9.)
Needless to say, all that success has produced some eye-popping
numbers. "Dell is now growing revenues by 50% in an industry growing
by 20%," says Philip Rueppel, an analyst with Alex. Brown who has
had a strong buy on the company for the past two years. Says Rick
Schutte of Goldman Sachs, another long-standing Dell bull: "This is a
company that is delivering and beating the numbers. I have earnings
climbing 63% for the year, but I wouldn't be surprised if they end up
coming in as high as 80%." For all their optimism, even these bulls
have found themselves consistently surprised by the company's growing
strength.
Dell has long enjoyed a core of faithful institutional investors
such as Merrill Lynch Asset Management and Transamerica, but when the
company started posting those strong gains last year, momentum
investors like Fidelity, AIM, and Friess began accumulating
multimillion-share positions. As if that weren't enough to drive the
shares up, on September 5 Dell was added to the S&P 500. Within ten
days the stock roared ahead 22%, to over $40, as giant index funds
run by Vanguard, Barclays, and State Street scrambled to buy Dell.
. . .
What about the old Wall Street saw that says if you are going to
buy tech stocks, buy software companies because their products are
protected by patents, and avoid PC makers because they're in a
commodity business with no barriers to entry? Then how come Dell's
stock is running circles around even Microsoft? "What that axiom
ignores," says Rueppel of Alex. Brown, "is that Dell has
differentiated itself through its brand name and, most important, its
distribution system."
By selling directly to customers, Dell eliminates the middleman,
passing the savings on to its customers. Rueppel figures Dell's
machines cost 15% to 20% less than a comparable Compaq or IBM. Lower
prices ramp up sales, which in turn widen margins. And by
custom-assembling each order, Dell has also essentially eliminated
inventory.
While lower prices from competitors could theoretically crimp
Dell's growth, the real threat at this point is the general state of
the PC industry. Some analysts are wondering if the
weaker-than-expected numbers recently announced by Intel portend a more widespread softness in the PC business. The bull case: that so far growth remains strong globally, while in the U.S., massive
upgrades are still ahead. Over 50% of all existing PCs still run on
486 chips or less, which suggests millions of units of pent(ium)-up
demand for new machines.
Analysts say Dell will also benefit from consolidation. There are
still more than 150 PC makers worldwide, and the top three, Compaq,
IBM, and Dell, have only 25% of the market combined. Those with the strong brands and effective distribution plans are sure to gain
share. "Looking down from 30,000 feet--yes, the stock has moved up," says Schutte of Goldman. "But do I think Dell will still outperform
the S&P 500 over the long haul? Absolutely."
Meanwhile Dell's supercharged stock has actually created problems
at Brandywine. Friess' five-million-share holding in Dell had grown
so large in dollar terms that he sold more than a million shares
recently for diversification's sake. Since then the stock has moved
up so quickly, the reduced stake is back to the value of the original
position. Some problem. Friess and his analyst still like the
stock, even with it up sixfold. "We wouldn't own the stock unless we
thought it was going up," Harrington says. "You have to look at
what's ahead for a stock, not what's behind it."
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