RE: Dell's valuation
Dell's valuation depends on individual investors' decisions about what Dell's future earnings and market value will be. In fact, no one knows, and it is disagreement about future values that drives the market for this stock. Some people (apparently most of the members of this thread) believe that they can get better returns on their money in Dell than anywhere else. Others who don't own Dell, usually say they think it is two expensive, and that it will either stop growing or collapse some time in the future. Some of the holders believe that too, but believe that this ride is too good to pass up for the time being. I would place myself in this group.
Don't get me wrong. I think that Dell is a marvelous company, with a great business model, and excellent management. I think the world is its oyster, and it might very well grow at 30 to 50% a year for five years in the future, if it is well-managed. Its major threat is that it is concentrated in in the PC industry where growth is uncertain. To compete with cheap devices and set-top boxes for the mass market, PC makers will have to make many PC's very cheap -- about the cost of a TV set of equivalent screen size -- and Dell prefers to produce expensive PC's (compare prices on dell.com to compusa.com).
No doubt when necessary, Dell will be able to compete on price better than anyone, but the effect of low margins may lower its EPS growth faster than volume raises it with a resulting decline in P/E and decline in growth rate of stock price. This, by the way, is the same problem that has affected Intel, in, in the NIC market, 3Com.
The outcome in all of the problems depends on timing and execution. Dell was lucky in being slow in its expansion in Asia. Dell's execution has been nearly flawless, so far. But the growing sector in the Internet based business in the future is going to be servers, and here Dell trails Compaq (so far) on price-performance
tpc.org
Price/performance in servers will be critical because rational customers are relatively uninfluenced by hype but insist on reliability and availability. Dell IMO must increase its R&D and win the blue riband in this market if it is continue to succeed.
High valuations (P/E > 30) can be justfied only if there is a clearly feasible plan laid out for discussion. We need to hear more about Dell's plans for world conguest, cheap PC's, competition with devices, and strides in the server market. There are no secrets here, and the threats will not go away if we agree not to talk about them. |
