Dell Computer keeps digging trenches in the PC price war, but Wall Street questions
whether the battle is even worth fighting.
Confident of victory, the PC maker has made it quite clear that it will continue the campaign
and has given no signs of a letup.
For analysts, the biggest worry is that Dell has initiated a protracted war without any clear end
game. If you're going to fight a war, there'd better be some spoils for the victor, analysts say.
Investors don't mind that Dell is gaining market share in the PC sector, but they're not willing to
trade profits for market share forever.
Dell didn't do a good job of
soothing Wall Street in its
first-quarter earnings
conference call Thursday. The
company met reduced
estimates with earnings of 17
cents a share, but told
analysts to cut estimates
slightly for the second
quarter. Dell said sales could
fall 3 percent to 5 percent in
the second quarter,
sequentially.
The company is being
"ruthless" about cutting costs
and recently cut jobs, but it
appears that Dell is hurting
itself as much as the
competition.
Dell executives said it's worth the fight. "The opportunity to consolidate share quickly has never
been better," CEO Michael Dell said in the company's conference call. "The share gains are
the engine for future growth."
But Dell wouldn't answer questions about what market-share number would satisfy him, an
indication that the price wars could go on for a while.
"We do not believe we are at the bottom of this intense price competition but just played
another move in a chess match that is far from over," said UBS Warburg analyst Don Young.
"What is on the other side that makes the price war worthwhile?"
Analysts said Dell has set the pace for the PC sector, which could eventually look like the
disk-drive or color-TV markets--commodity businesses where few companies can actually
make money.
Dell figures it can lower prices, be more efficient and claim victory when its rivals consolidate
and exit the PC game. Cost cutting will keep Dell profitable. When a truce is called, Dell
theoretically will have the most market share and be able to grow its bottom and top lines.
Few analysts doubt that Dell is the most efficient of the bunch, but they still have concerns
about profitability for the PC industry. "Sometimes being a great house in a bad neighborhood
is not a good thing," said Morgan Stanley analyst Gillian Munson.
"We think that Dell has set itself on a course to continue to gain share. However, what isn't
clear yet is where this takes the company over time," Munson said. "Dell's team talks a lot
about gaining share and driving profitable growth. However, this misses one thing investors are
really in need of: solid manageable bottom-line growth."
ABN AMRO analyst Robert Cihra said Dell's plan to trade profit margins to wage a price war is
"somewhat irrational for a commodity-like market." Cihra points out that Dell increased its
worldwide PC market share to about 13 percent in the first quarter this year from less than 10
percent in the first quarter of 1999, but over that same two-year period, Dell's operating income
fell.
"Shipping an extra 1.6 million units per quarter, Dell's gross profit-per-unit was down an even
greater 27 percent," said Cihra, who noted that profits have fallen even though Dell's share has
grown in the higher-margin markets for notebooks, enterprise servers, storage and
workstations.
Despite the big talk from Dell, Cihra said the PC maker could ease off its price war as soon as
the PC market shows signs of growth and component costs stop falling. "The company wants
to grow profits when the PC market rebounds," he said. "Dell has to show it can grow profits,
not just be profitable as it grows."
But Cihra's theory is based on PC market growth rates picking up. Dell executives haven't said
they will eventually refrain from trying to price the competition out of business.
Perhaps the biggest reason Wall Street doubts Dell is the lack of signs that the company's
main rivals are going to concede the market. Second-tier PC vendors may crumble, but they
aren't a threat to Dell anyway, analysts said. Simply put, Compaq Computer, IBM and
Hewlett-Packard are not going to exit the PC business, and one of them would have to give up
to significantly boost Dell's market share. That fact sets up a game of chicken where no one
wins.
"We'd all like to tie this up neatly with a winner declared, but the idea that others are going to
throw in the towel doesn't make sense," said SG Cowen analyst Richard Chu. "I expect to be
on the beach doing something else by the time this story finally plays out." |
