kaka - I have posted my reasoning on DELL share price a number of times, but here it is again. In 1998, DELL was richly priced based on revenue growth of 50%, which was unsustainable given DELL's size. In 1999, DELL moved to open up their model, with initiatives in servers, storage, and a belated consumer strategy. Only the server initiative panned out, and in addition, supply chain issues highlighted the dark side of DELL's model - in a tight supply market where components are scarce, DELL's zero inventory model can become a liability.
As a result of those factors, and changes in DELL management's guidance down to the current 30% growth range, the stock price pretty much stabilized in the 40s. But DELL's revenue growth did not stop, it only slowed down, and is still twice the industry's rate.
So over the last 2 years, DELL's valuation has gradually caught up with revised revenue growth targets. DELL management has developed policies to control the supply chain problems. They continue to execute well in the field. They continue to manage the business well, shifting to higher margin products to maintain average selling price. They have stayed true to their fast follower model, avoiding big R&D expenses, acquisitions and other moves which would disrupt their financials.
So at this point, I believe that DELL is fairly valued and should begin to grow stock price in line with revenue growth, as investors have accepted the new growth model. If DELL manages the 30% revenue growth they target, given that they were well below that for the first half of the year, they will provide better than 20% for the rest of the year.
DELL seems to be trading in a range of mid-40s to mid-50s. If we call the base 50, then the 20% revenue increase gets us close to 60. If we call the base a little lower, than maybe mid-50s.
Maybe Niles is right and 55 is the number, maybe a couple of good quarters will change perception. I feel pretty comfortable either way but am doing my investment strategy based around 60 at year end... |
