CJ, El, thread, here are some interesting observations from the Yahoo! thread:
Re: Compaq a great company
by: gorimepon
01/22/01 09:17 pm EST
Msg: 212893 of 212898
Allow a few more quarters.
Someting of a slow death - it is going to be very amusing to watch. Nobody has ever succeeded in making profits by buying
business in a competitive business (price wars) but maybe Dell knowS the trick that nobody else ever knew. Take Lucent as an
example. They tried to buy sales aggressively from 1998, but each quarter's shortfall in turn had to be met by bringing forward
the next quarter's sales through massive discounts. Eventually, they could not catch up and then the warnings came.
Not surprising that Lucent and Dell are now competing for who can make the most warnings!
JMO, but why even buy share in a business that will be dead in a few years - much like Worldcom trying to buy share today in
long distance. Mr. Dell believes the PC will be around for ever and he may be right. But the economics do not support it - why
buy such an expensive piece of equipment that crashes frequently (ala Microsoft software reliability) when you can buy several
devices (appliances) that are much cheaper and far more reliable because they focus only on specific tasks.
Little secret that Dell has always used - the biggest advantage in the "Direct model" has always been the S&H, a charge that
indirect sellers do not have the priviledge of. Say you buy a system from Dell and they charge you $100 to ship it even though
they pay UPS less than $20. They make a gain of $80 compared to indirect selling. On a $1200 system, the shipping profit is
6-7% which is one third of their 20% margin. Not surprising they cannot make earnings this quarter because they gave a lot of
"free shipping" in the last several months, among other things. By comparison, the savings from not holding inventory is less than
$10 - mainly the capital they save by holding two weeks less inventory that competitors
The most damaging of all is Dell's option exposure. While this will not hurt the bottom line, it badly hurts morale because
nobody likes to see their company lose the $2 - 3 billion Dell will lose on the 100+ million puts they sold. Also, it will use up a
lot of cash which will make it difficult in future to continue buybacks which support the stock at present. Interestingly, they are
still selling puts - maybe to help pay for the shares they will be forced to buy back. Microsift has the same problem, but has more
than five times as much cash for twice the liability, so they will feel the impact less.
THE ANALYSTS MAY BE LAZY, BUT THEY ARE SMART. EXPECT DELL TO GO UP A FEW MORE DAYS TO ALLOW
THE ANALYSTS' COMPANIES TO GET OUT BEFORE THEY LET THE STOCK SINK. BUT THE POOR INDIVIDUAL
INVESTORS JUST WILL NEVER LEARN.... |
