Comments from Merrill:
dailynews.yahoo.com
Merrill Lynch Sees Dell Growth Goals As Hard To Reach
NEW YORK (Reuters) - The personal computer industry's long-term growth is imperiled by price wars and growing customer demand for low-priced systems, spelling trouble for Dell Computer Corp. (Nasdaq:DELL - news)'s aggressive growth goals, a top Wall Street analyst said Thursday.
In a summary of his outlook for the PC industry, Merrill Lynch computer systems analyst Steve Milunovich said demand for personal computers and the performance of stocks in the sector "should be fine in the near term."
But he expressed concern that Dell's goal of growing several times faster than the industry as a whole "will prove hard to achieve, perhaps resulting in pricing pressures."
"We think Dell's superior model affords some protection, but valuation remains an issue," Milunovich said.
He was referring to the perceived advantage Dell's direct-distribution model has given it versus rivals who rely largely on middlemen to distribute their products, and the resulting lofty prices Dell's stock has commanded from investors.
Still, Milunovich maintained his "accumulate" rating on Dell stock and his neutral position on rival Compaq Computer Corp (NYSE:CPQ - news) .
He said PC industry revenue growth has slowed to 3-5 percent per year -- due largely to falling computer prices -- but market researchers are forecasting an acceleration to double-digit growth over the next several years.
Milunovich's comments came a week after Dell's stock plunged following its fourth-quarter earnings report: earnings met analysts' expectations but reflected slowing revenue growth.
Dell has averaged better than 50 percent revenue growth in recent years, but the annual growth rate in the fourth quarter, ended in January, was 38 percent -- a torrid rate compared with Dell's rivals but shy of what investors have been betting on.
Milunovich reiterated his view that International Business Machines Corp. (NYSE:IBM - news) should quit certain parts of the PC business where it cannot successfully compete.
Compaq, IBM and Dell rank No. 1, 2 and 3, respectively, among suppliers of PCs worldwide, measured in shipments of PC units.
Commenting on the PC industry outlook overall, Milunovich argued that analysts and investors should focus on revenue growth -- actual dollars PC makers generate -- and less the unit shipment growth, by which the industry often measures itself.
"PC industry revenue growth has slowed, mostly due to lower prices," Milunovich wrote. "Unless sales growth accelerates, the risk of PC price wars is increasing."
He added, "The problem is unlikely to be unit growth, which we think could be around 15 percent for the next few years as PCs continue to become more widely used around the world and the Internet attracts new buyers."
He cited three general concerns: average selling prices for computers may continue to decline, price wars will result from demands for market share growth, and the rise of low-cost consumer appliances as alternatives to PC. "Dell will try to regain its manhood by accelerating the top line,'' he said, referring to the company's recent dip in revenue growth. But he asked, "Can even Dell grow at 40 percent for long if the market's growing just 5 percent?" |
