jhg, regarding valuation:
<<Assume PC sales presently around $150 billion grow 15% annually for 5 years to about $300 billion. (I think this is generous.)>>
let's try and go through this quickly:
1) pc sales are only one aspect of Dell's business
2) his current pc sales of $150 billion do not include enterprise sales and service; with service being one of the fastest growing segments
3) he's using an "average" of 15% growth when nothing grows in exact averages. one of the five years will most likely have a "baloon" year where growth will average well above his 15%, possibly as high as 25% or higher. the reason for this is that 87% of the world is still without computing power with world population adding at least 80 million souls each year. In five years the world will contain at least 500 million more people. India, the world's largest democracy is rapidly commericializing with pcs. if the "baloon" year comes toward the end of his fifth year analysis, total pc sales could reach closer to $355 billion, nearly a 20% projection above his number, while retaining an average of about 16% growth, which he calls generous.
4) market share is only a yearly average and does not account well for the capture of increased sales. Let's say $150 billion in sales this year, not including enterprise sales, and it grows at 17% next year to $175 billion in sales (IDC's number is 17%). The difference in billions is $25 billion. of the $150 billion Dell retains 5% of this ($150 X .05 = $7.5 billion which is about what Dell's pc sales amount to over the last twelve months). however, due to exponential growth, Dell retains 20% of the NEW SALES, the increase of $25 billion, or $5 billion. Dell's pc sales now equal $5 + $7.5 = $12.5 billion, or only 7% of the total $175 billion. Dell's pc business grew by 67% while it's share of the total revenue grew by only 2%. is it possible for Dell to capture 20% of the NEW SALES; very assuredly - they're nearly doing it now.
5) the enterprise business is expected to grow, per IDC, at a rate much faster than the overall pc business, as will service of an enterprise network. Dell's enterprise business grew 58% sequentially. total enerprise sales and service alone could easily top $100 billion in five years as everyone around the globe becomes connected. Dell's share of this will be very high because of its model. it is more efficient for systems to be ordered/serviced via Dell's model than to spend "months" getting quotes/service through alternate means
6) peripheral sales amounted to 6% of Dell's total revenue this past quarter. this percent has been increasing steadily. peripheral sales amount to about $140 billion industry wide now (depending what you include in that package - be it software, printers, storage, service). peripheral sales are becoming an ever increasing part of Dell's business. If you give $140 billion a 12% increase annually you have $246 billion in five years, a modest sum, a modest growth rate. Could Dell capture 6% of this revenue ($15 billion)? certainly. if you achieve a 11% overall pc market share in five years, Dell could easily caputure at least 6% of the total peripheral sales; and much of these sales could come through the internet.
7) he gives 6% as the net percent for Dell's earnings ratio. Dell's earnings ratio has been double that, nearly 12%. i guess even by his calculations then Dell's stock price would be at least $168 in five years. it is possible that Dell's earnings ratio will be higher given the next point:
8) when you consider Dell's revenue, you just consider revenue from "Dell Finance", the lease form. when Dell sells a system for $2400, the actual lease value on the system is close to $3600 over a three year period. thus, on a $2400 sale Dell's revenue is increased above the orignal purchase price. the lease revenue carries, of course, a much higher net earnings ratio than cash outright. system lease is becoming more and more the modis operande of businesses around the globe.
9) Dell will be offering internet hookup service for a monthly fee this year. with all those Dell's out there, how much revenue will this generate along with advertising, sales cuts, etc.? these items, of course, carry a much higher net earnings ratio
10) will Dell target the home pc market? if it does, what market share will it grab?
if Dell has 25% market share in five years Dell's stock price, given all these variables would be closer to $500, not $84 given his simplistic analysis. if Dell retains even a more plausible 15% market share but excells in all these other areas, it should not be unthinkable to consider that Dell's revenue could equal $100 billion with $11 billion in earnings (11% net ratio), or be earning $8.91 which X 30 equals $267. a stock price of $267 in five years would imply an upward range of nearly $380 (at least 50 X at some point)
i hope this helps. dell's revenue model, i think, is not as simple as some naysayers on these threads would have us believe
i think for a better understanding of Dell's overall revenue model you could look at Merck's revenue model for the past ten years and how they've continued to generate ever higher revenue with an ever increasing stock price. Dell is now where Merck was at the beginning of the 90s |
