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Investors See Dell Lifting Off When Y2K Cloud
Dissipates
By Eric Moskowitz
Senior Writer
11/29/99 7:00 AM ET
For the first time this decade, Dell (DELL:Nasdaq) skeptics are smiling. Y2K
looms, promising a sales slowdown that has already forced Dell to make its
first earnings warning in six years. Dell's stock, which has usually at least
doubled by this time of year, is up only 13% in 1999, a mere fraction of the
Nasdaq's 52% gain.
But come Jan. 1, Dell critics may awake with a hangover, say analysts and
observers who contend that concerns about Dell are overdone. These people
say Dell's core corporate PC business remains robust, that its Internet
strategy will vault it ahead of PC rivals and that the recent torpor in Dell
shares leaves them bargain-priced for the first time in years.
"I'm just starting to look into the stock again, and it looks very attractive,"
says Steven Esielonis, a portfolio manager at State Street Global Advisors
who sold much of his portfolio's Dell position early this summer to move into
Gateway (GTW:NYSE).
If Dell executes as it has in the past, 2000 "will be the year of Dell," says
Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. He rates Dell a
buy, and his firm hasn't done Dell underwriting.
What Investors Want
What PC investors want now, it seems, is to see a return to consistent
quarterly earnings growth along with new sources of income, especially in the
red-hot Internet sector. For instance, Gateway's beyond-the-box strategy of
providing Internet access, retail support and creative four-year financing
packages has been a big hit on the Street. Its stock is up over 200% this
year and trades at a higher multiple than Dell -- even though Dell is growing
faster and more profitably.
Dell, meanwhile, has thus far failed to excite investors with its own Internet
initiatives. Investors yawned when Dell.net was launched this summer, which
is ironic considering Dell runs one of the world's largest Internet businesses,
generating $3.1 billion in sales in its most recent quarter alone. And Dell's
performance last quarter didn't exactly silence those who expect it to take a
hit as Y2K concerns slow corporate PC purchases: The Round Rock, Texas,
company missed third-quarter earnings expectations, posting a disappointing
(for it) 26% year-over-year rise in net income on 41% revenue growth.
Dell also has suffered from what can best be described as "multiple
compression," says Philip Treick, portfolio manager with Aesop Capital
Partners, a Dell shareholder. Treick explains that at the start of this year,
investors looked at the company's price-to-earnings multiple and decided it
was too rich. In fact, Dell stock had a P/E for its fiscal 2000 ending in January
of nearly 60.
But as it heads into fiscal 2001 this coming February, Dell's P/E is a more
respectable 40. By contrast, Gateway's forward P/E is 55, much higher than
its expected annual revenue growth rate of 20%.
"Dell's movement reminds me of how Microsoft (MSFT:Nasdaq) flatlined from
1992 to 1994 as investors waited for its stock to become more reasonably
valued," says Treick, whose firm is long Dell. But since 1995, he points out,
Microsoft's stock has risen 1,700%.
The Dell Antidote
An attractive valuation alone may not be enough. And so far this year, "Dell
has had a tough time proving that it's proactive outside the box," says Lou
Mazzucchelli, a PC analyst with Gerard Klauer Mattison who rates Dell a
buy. His firm hasn't done Dell underwriting.
Sensing this, Dell is feverishly adding new products to its current suite of PCs
(which accounted for 59% of total revenue in the latest quarter), portables and
laptops (24%), and servers and storage (17%). One product Dell will be
offering to corporate customers next week is Research in Motion's
(RIMM:Nasdaq) BlackBerry pager, which allows users to access and respond
to email. No financial details on the scope of the deal were released, but it
signals to the Street that Dell is intent on leading this new age of computing,
says Piper Jaffray's Kumar.
The pager is already de rigueur among corporate executives such as Michael
Dell, much as the Palm Pilot was four years ago. Dell also is expected to
unveil its new WebPC product next month. The key to both products is they
are compatible with Dell's corporate customer base. In the future, Dell plans
on signing more deals that bundle appliances with the PC. "Dell has always
had a good way of looking at new technologies," says State Street's
Esielonis. "I believe Dell can outflank its competitors yet again."
With the Y2K cloud evaporating and Internet catalysts on the way, money
managers are once again drooling at the prospect that Dell could return to its
position as momentum stock of the decade. "Dell seems almost like a value
stock right now, which makes me want to load up more than I just did," says
a New York-based money manager, who requested anonymity and is a Dell
shareholder.
Dell is still one of the most heavily traded stocks on the Nasdaq, but it lacks
any real direction: It has traded between 36 and 42 for much of the year.
Once the enterprise-focused Dell gets past Dec. 31, says Gerard Klauer's
Mazzucchelli, "Dell may be off to the races." |
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