Paul, apparantly we have two points of disagreement.
The first is that you say that there are no barriers to entry, since technology and patents would not stop anybody. Your problem here is that you continue to think of Dell as a hi-tech company in the same way that INTC is. Dell is a high-tech assembler and distribitor. Inventory management is it's technolgy, and I know of no other American company that does it as well as Dell. If you compare Dell's ROA to just about any other company you will be truly astonuded.
The second has to do with your statement that "Dell is a great company if it were trading at a PE multiple of 10." Now, assuming that you have a no backround in finance, I will demonstrate mathematically that you are incorrect. Let us assume that a company generates a free cash flow of $1 per annum. Let us further assume that this is a perpetuity, and that the market discounts this cash flow at 15%. This implies a P/E of 6.67 in a non-growth environment (1/i). Now, if we use the same set of assumptions and ask what P/E is implied by 15% growth in perpetuity the answer is 44.34x.
So what are the expectations for Dell over the next few years? As I recall, Dell is expected to earn about $3.60 next year and conservativel increasing by about 30% for the next several years thereafter. So let's assume that in the year 2001 they earn $7.91, and at that point they suddenly become mature, growing at only 10% per annum in perpetuity. The P/E in 2001 would be 17.93 (in line with a company expected to grow at 10% per annum), and the stock would sell for $141.82. Now, applying the 15% discount rate back to the present, we would have a current share price of about $93.25.
In order to justify a P/E of 10.0, a company would need to generate eps growth in perpetuity of just over 5% at a 15% discount rate. Does this picture fit DELL? I think you would agree that it does not.
Paul |
