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Top Stories: Dell Confronts Talk of a Slowdown
By Eric Moskowitz
Staff Reporter
11/12/98 9:30 AM ET
Dell's (DELL:Nasdaq) enormous success has been built on growth. But as the PC direct seller gets set to report earnings this afternoon, an analyst with a string of prescient calls sees a slowdown as inevitable.
Analysts expect the company to earn 27 cents a share in its fiscal third quarter ended Nov. 2, but the consensus number has traditionally been conservative by anywhere from 2 to 5 cents. Last year the company earned 17 cents a share.
But now that Dell's PC desktop market share is on par with Compaq's (CPQ:NYSE) in the U.S., can it still outpace its peers in a maturing market?
Nope, says Ashok Kumar of Piper Jaffray. "Dell's third-quarter worldwide sequential growth rate in desktops, at 8%, lagged the 10% desktop market growth rate" for the industry, the semiconductor and hardware analyst wrote clients Monday. (Piper Jaffray hasn't done any underwriting for Dell.)
Dell's stock is not showing any signs of slowdown -- it is up over 50% since Oct. 8, and nearly 10% just this week. The stock rose 1 5/8 Wednesday to end at 71 15/16, yet again in record territory. And Karl Dimlich, an analyst with the money management firm Columbus Circle Investors, says Kumar's slowing growth call is "mistaken."
"Even if Dell doesn't grow as fast as the industry for one quarter, that doesn't mean it won't grow by over 50% in the next year," says Dimlich, who doesn't currently have a position in the stock. "Either way, if it does have slower desktop growth, it will be more than made up for in other areas," such as servers and notebooks.
Dell, for its part, told analysts in September that 13% growth from its second quarter is "doable." That's what the reclusive but respected Goldman Sachs analyst Rick Schutte has estimated, according to Amir Ahari, a senior analyst with International Data. Based on this estimate, Dell would record at least $4.9 billion in revenue when it reports Thursday.
In terms of worldwide sales, Dell continues to see strength in North America and Europe, notes BancBoston Robertson Stephens analyst Dan Niles, and some growth in Asia/Pacific, "but [CFO Tom] Meredith said it wasn't as much as Dell would like to see." Translation: Investors may see a dip in Asia/Pacific growth, especially if the economies in Asia/Pacific -- as well as South America, another big target for Dell growth -- do not improve in the near future.
Investors will also be keeping an eye on PC average selling prices. Dell's average selling price has declined to $2,410 this July from $2,700 last year, and Niles says Dell's average price should drop a bit more to around $2,385 during the November quarter. These averages are still the best in the PC industry.
Now that desktop PCs have become a commodity business with never-ending price competition, other defining factors will emerge. "Inventory was the key to Dell's success yesterday, and today it's customer service," says Philip Treick, a vice president with Transamerica Investment Services. "After attending Dell's analyst meeting, it's clear that they are absolutely focused on this -- with a laser beam." Dell is the top holding in "most" of Transamerica's funds, according to Treick.
Customer service may add some value, but what investors really want to see is consistent revenue growth. Piper Jaffray's Kumar, who still has a strong buy rating on the stock, went out on a limb Monday when he wrote clients: "The long-term growth rate implicit in the current level of the stock price may be unrealistic." Dell investors are hoping that this contrarian opinion isn't on the money |
