lewis thinks dell sucks
Now, returning to one of my favorite subjects: DELL… As we said yesterday, DELL guided revenue up a whole 2 percent last night (which obviously isn’t much to speak of) while leaving EPS estimates unchanged. This is the second quarter in a row that DELL has marginally guided up revenue but left EPS guidance unchanged (recall that DELL guided the previous quarter's revenue higher back on Aug 15 when DELL was trading at $27.5—it’s now at $25). Obviously, the company is making market share gains if these numbers are to be believed (apparently giving away BMWs has stolen sales from CPQ and GTW but the generic “white box” guys are the real competitors out there and giving away cars isn’t going to steal share form them when they can sell stripped down PCs for far cheaper than DELL or anyone else for that matter), but even with these market share gains, the company did not guide earnings up. As I’ve said before, the primary problem with DELL’s stock continues to be the price. Without dramatic earnings growth, its valuation of 37x trailing (and 31x its peak fiscal 2001 earnings) seems a little ridiculous in a post-bubble world. Speaking of which, even DELL itself commented today that PC sales and the economy were not bouncing back as they had hoped. DELL’s COO said, "We are not seeing any evidence yet that there is a pickup… We had hoped that in the back half of this year ... we would see some improvement. But it is starting to look like that is not going to happen."
Looking at DELL’s valuation in another way… Total worldwide sales of PCs comes in at around $150 bil, and DELL has around a 15 percent market share (up from 11 percent in 2000). Let’s say their market share doubles to 30 percent over the next couple years, and somehow a miracle occurs that prevents the total dollar volume of PC sales from shrinking (Something that I find highly unlikely due to all the overcapacity out there that is putting constant pressure on prices as demand falls off. DELL itself just slashed prices on flat panel displays on Monday). How can DELL’s market cap that is currently equal to about half of worldwide dollar volume of PC sales make any sense? I submit that it can’t.
Like many stocks out there that remain egregiously overpriced, DELL’s stock doesn’t need a whole lot of bad news in order for the stock to drop at this point. It just needs for things to not dramatically improve, and its stock can still fall a long way. With DELL apparently (at best obviously, since we still have Q4 and the rest of Q3 to go for that matter) on-track for its 3rd year of virtually flat revenue and earnings that will certainly be up from the fiscal 2002 debacle, but still well shy of its peak in fiscal 2001 when there was a virtual orgy of PC buying that is likely to never be seen again for a long, long time. Does anybody really think that DELL can produce the 30 percent growth above that peak EPS and take over global share by such an enormous margin that somehow its valuation going forward in a post-bubble world would be justified? I think the answer is unequivocally “No.” In any event, this sort of valuation analysis can be used in many areas of technology at the moment, and I thought it was worth going through the exercise. As I’ve mentioned before, I’m short the stock. So I obviously have an axe to grind, but that’s the way I see it. DELL gapped up this morning and traded higher but closed near the low of the day, up 3 percent. |
