I assure you children that 10 years hence Dell would be
20 fold if not 100
This is the kind of silly thinking that has driven up the stock price of this superb company beyond any sustainable means. DELL will not go up 100 fold in the next ten years. Its business is an increasingly commoditized product.
DELL has a great business model for delivery and production--the best yet over the Internet, which is the new Industrial Revolution.
DELL's problem is that it does not have any sustainable intellectual capital other than its business model for delivery and production. And it is intellectual capital that is sustainable and endures. Even then, superior intellectual capital is not always enough to save the day.
What happens over time to commodity products in the communications industry?
The five best examples I can think of come straight from my hometown--Chicago.
Every one of these communications' leaders enjoyed spectacular success, but ultimately they were superceded by a better type of technology or became deeply commodititzed. And in all circumstances, their founder and/or CEO was elevated to God-like status by the shareholders.
These examples include the following:
Western Electric--The company that made the telephone. It was part of AT&T, which has of course spun off Lucent. But making the techonological commodity miracle of its time is no longer part of the company. What has sustained AT&T is its infrastructure, customer base, and intellectual capital. Its customer base is built in part on consumer loyalty--the kind of loyalty that DELL will cease to see from its business customers if it is not able to deliver a cheaper equally competitive product. And if DELL does not have the intellectual capital for the primary component parts of its products, then DELL will see increasingly low margins. Today, what was once the world's largest factory--Hawthorne Works--is now a shopping mall in the suburban barrio of Cicero.
Teletype. People over 40 remember the teletype machine. What an advance in communication that was. Those machines are starting to show up in museums. Today, that huge factory is a shopping mall in the suburb of Skokie.
Television. Now here's a product that revolutionized the world. No company more than Zenith was responsible for its development than Zenith--as in bankrupt Zenith. Zenith just closed its last factory in suburban Melrose Park. I got a homeless guy who cleans my windows who used to be a foreman at Zenith. Aside from the fact that drug problems account for his status, this guy waxes nostalgic about Zenith's former stock performance
Modems: There have to be people on this thread who made some serious money on USRX. I remember Casey Cowell from the days when he opened his shop across from the Biograph Theatre where Dillinger was shot. For a while, USRX had some proprietary cutting edge technology. When it ceased to have that, Cowell sold his company to COMS--at a price that has clearly been detrimental to the shareholders of COMS. For a five year period in the early to mid '90s, USRX stock exploded. Since early '96 the value of it and its successor has declined by about two thirds. Go back to the old chat lines, and you will see a lot of messages analogizing stocks to woman and wine on those threads as well. Today the USRX plant is looking for a tenant--perhaps as a pharmaceutical plant, which is what it was before USRX came along
Cell Telephones: Remember a company named Motorola. They basically invented the cell phone. Missed out on bringing a digital phone to market, and as a result this company's stock has appreciated all of 15 percent during the past four years, while the average stock price of its competitors such as NOK.A, VTSS, TLAB, LU, MU, and others has increased 600 percent during the same time period. Management that was widely praised as "The Best" is now widely perceived as inept. The truth lies in between, just as it does with Mike Dell and his minions.
And all of these companies had far greater proprietary intellectual capital in terms of what went in their product than DELL has.
I'll give you a sixth example. The first MacDonald's franchise was in Des Plaines. Obviously Micky D's has thrived (albeit on a much slower pace) despite the fact that it makes and delivers a commodity product. And it could be argued that this is the sort of company that Dell will become. No way. With consumer products, there is a very strong chance of consumer loyalty. But in the cutthoat business that DELL is in, there is no such loyalty over time.
Simply put, this is a company whose margins could reach the levels of grocery stores, and there are chains out there whom you have never heard of whose sales equals Dells current sales.
Will Dell fall out of bed in the near future. Maybe. Maybe not. But its day of reckoning is nearer and nearer.
No the stock market is not like wine--not one bit. It's like fashion. And a company whose margins are about to decline, whose rate of growth is increasinly lower, but whose price reflects a previous reality of better times, will soon be shown the door by our financial fashion whoremongers. |
