Jim, the drop in ASP's can be offset by a reduction in the product's MLB (Material, Labor and Burden). If the dropping ASP is offset by the MLB on a 1:1 basis, then the gross margins remain the same.
The question that should be answered is: Who is driving the reductions in the ASP? Is it the market place, or is it Dell themselves? If it is the market place, and Dell can't keep driving the MLB down as needed to offset the falling ASP's than there is trouble ahead. If Dell has control over the ASP's and the MLB, then things will be ok.
However, I seriously doubt that Dell is driving the reductions of the ASP's. If they did, they would be leaving money on the table. I don't believe Dell would do this. So, I must believe its the market place that's driving the ASP's down. When the industries component inventory surplus is reduced, the prices will stop falling, in fact they may rise. This could spell trouble for Dell.
The Wall Street Analyst's are closely following the ASP's and their affect on Dell. When Meredith announced today at the Paine Webber conference that ASP's were dropping from the levels in the last quarter, the sell orders were triggered. The fact that Meredith stated that margins were ok, and there were no problems within the company were not much comfort to the Analysts.
Keep in mind, Dell's current stock price is based on "perfection". Falling ASP's are not in the universe of perfection...at least not with Wall Street.
Stock Bull |
