Jim, I think you haven't a clue about what drives Dell. Let me take one excerpt from your remarks which I believe capsulize your concerns:
DELL's more difficult year to year comparisons, it's valuation, and the overall weak conditions of the world economy will make it much more difficult for DELL to continue its past growth rate. I remember that about two and one-half years ago you could buy DELL, GTW, and CPQ for a P/E of less than 10. The only difference b/w now and then, is that PC sales growth as an industry has fallen from 25-30% to approximately 11%. Since DELL was growing just as fast a rate back
then, I ask "Where's the current value???". What is DELL going to do with all the new and planned manufacturing capacity when the entire industry goes to hell??
Basically, I break the concerns down to three areas:
1. Prospects for continued hypergrowth in the face of decelerating PC demand;
2. Weakness in world financial markets; and
3. Valuation of the stock.
Let me take these issues in order:
1. The prospects for continued hypergrowth in the current demand environment may indeed be limited. But this presupposes two assumptions, both of which may be faulty:
a. PC demand continues to decelerate; and or
b. Dell limits its business to current offerings;
But businesses are not stagnant. It was only about twenty years ago that IBM invented the PC. IBM no longer manufactures Selectrics. The point is that businesses evolve to meet new environments, and Dell will do so.
2. Weakness in the world's financial markets is indeed a concern. Dell has targeted two areas which are currently weak: Asia and Latin America. So the question really revolves around two subsidiary questions:
a. How likely is Dell's existing markets to be impacted by the woes of those regions; and
b. How soon before we can expect these regions to turn around?
Inevitably severe and sustained economic contractions in one part of the world will effect other parts as well. In particular, the US economy is dependant to a great extent on the economic health of Central and South America and Asia. So it would be naive to believe that our economy will go unscathed. Nevertheless, I believe that Asia will begin to rebound sooner rather than later. And when that happens we will see an increase in the price of commodities which will in turn propel the economies of other countries.
As the international financial crises have unfolded, Dell, owing to a vastly superior business model has been able to profit at the expense of its rivals. In fact, the evidence is becoming clearer each day that the competition is seeking ways to avoid competing with Dell. Dell has accomplished this by taking advantage of the rapid deterioration in prices of subcomponents -- an advantage that its rivals cannot utilize because of systemic inventory control problems.
3. Valuation of the stock is at once the thorniest and easiest of questions to address. Thorny because nobody knows how to properly value a growth company. I have challenged value investors repeated to come up with a decent multiperiod valuation model, and they simply can't do it. But the valuation issue is also easy to address in qualitative terms. Valuation in theory depends on three parameters: the risk free rate of return, the expected future cash flows, and the riskiness of those anticipated cash flows. The reason that Dell's valuation as a function of forward p/e is quite simple. Each of those parameters has improved with respect to Dell. Interest rates are lower, and the risk to anticipated cash flows seems to be quite a bit lower, and Dell's strong showing in the face of recently decelerating demand augers well for an eventual resumption the rate of increase in demand.
There is much more that I could write, but I think this is enough for now.
TTFN,
CTC |
