Why the market is wrong about Dell
moneycentral.msn.com
Dell Computer (DELL, news, msgs) reported earnings this week that showed it continues to grow its most strategic businesses. It scared investors with a necessary reduction in expectations for next year, but when the company beats those expectations, doubters will return.
Here are the numbers: For its fiscal third quarter, net income was up 40%, from $483 million to $674 million; on revenues up 22%, from $6.78 billion to $8.26 billion.
Except for (or, perhaps, including) the company's recent failures to properly set and meet expectations, I think the market has a completely wrong view of Dell Computer.
Let's take a quick look under the hood, starting with the expectations issue.
Vice Chair Kevin Rollins and CEO Michael Dell appear to have agreed to set expectations at a level low enough to allow them the bar delta they will need (and then some) as they move from a desktop PC-centric business into a laptop, server, storage and service business. You might now call this company LS3.
They are handling moving a company that was riding U.S. PC sales growth (primarily) in the 50% per year range, to a larger company -- transitioning its markets while using existing customer bases, through a current growth rate in the 25% range.
Remember this? It came from long, long ago, in -- ahh-October, on News.com: "IDC now is forecasting only 10% year-over-year growth for the worldwide PC market, but (IDC analyst) Kay warned that the growth could fall into the single digits."
All of those folks were vastly wrong, but not before they were able to establish a media mindset that PC sales were collapsing. What is the price for being wrong? For IDC and the other RearViewMirror kids, there is no yesterday. But for the stocks of companies they deflate, there is all too much of it.
Dell's right track
On to reality: Here is, I think, what the media is missing in Dell.
Michael and the group are completely focused in the following ways:
Identify the fastest-growing markets. (Laptops, servers, storage, services.)
Carve out a niche for Dell in its existing customer bases (government, business) in these markets.
Transition into these by focusing on earnings, return on invested capital, staying lean and leveraging the direct business model.
If they succeed in this effort, what will happen?
They will first create a company focused on what really matters (vs. what Wall Street looks at this week), which are earnings and return on capital. These practices will emerge as being integrated into the direct model.
They will then use this strength on existing customers to move into the fastest-growing segments in their markets. If this works, they will have a double benefit, as they gain share and make profits at the same time.
Is this the story you are hearing from the media? Of course not.
Is there a catch? Well, in a sense, always. In this case, the question is: can Dell sell ever-more-expensive and complex boxes to its existing customer base, without additional sales efforts and related costs of sales?
Given their focus, I think you can assume they believe the answer is yes. I agree. I also think the PC market will grow again, in established markets, as we get into the Windows 2k upgrade cycle.
Guess that's why you read SNS TechTrends.
Go for it, Michael. |
