USINESS WEEK ONLINE
March 24, 1999
STREET WISE by Sam Jaffe
Why Dell is Taking The Market Lower
Even a sub-$1,000 PC can't keep the juggernaut from slowing further
With the Dow Jones Industrial Average index hovering around 10,000, a 218 point drop wouldn't seem like much. It's only 2%. We'll make it up tomorrow.
Tell that to Nasdaq investors: The Nasdaq 100 index was down 3% on Mar. 23. And there was serious bloodletting in the computer sector. Hewlett Packard (HWP) was down 2.6%, Gateway (GTW) lost 5.5%, and Micron Electronics (MUEI) was down 3.2%. The leader in this parade of grim faces was Dell (DELL), which fell 5.8%, and is down 12% in less than a week. Dell has been the bellwether stock in the computer industry. Now it's getting its bell rung.
What's bothering investors about Dell? First and foremost is an overall slowdown in PC sales. Some blame that on large corporations, which are spending their technology budgets on fixing their Y2K problems instead of on new PCs. Others see the problem as the inevitable decline in the growth curve for the industry. "I think that the PC industry is maturing," says Firsthand Technology Leaders fund manager Kevin Landis. "Part of what you're seeing is that PC companies have to adapt to running a very lean model." Either way, the PC slowdown is no longer just a fear or a rumor -- it's reality.
WHITE FLAG. Dell signaled as much when it announced as part of its fourth quarter results last month that it was already suffering from the slowdown. Although earnings were in line with expectations, investors were spooked by a drop in revenue growth. Even though Dell may be a mature company, top-line revenue growth is king in the commodity business of making PCs. And in the fourth quarter, Dell's quarter-over-quarter sales growth slowed from 55% to 38%.
Mainly to address that problem, Dell announced in mid March that it will soon introduce its first sub-$1,000 PC. While that might not seem like big news -- everyone else is doing it, after all -- it did signal a white flag from Dell's Austin (Tex.) headquarters. Executives there have until now dismissed the cheap segment of the market as a wasteland for profits and have refused to enter it. Now, they've admitted defeat.
Rather than react positively to that news, the market has punished Dell and the entire PC industry (with Compaq being the notable exception this time around.) Investors understand that Dell will need to sell a lot of low-end computers to meet its revenue targets. But they also know that could jeopardize its sales of more expensive (and profitable) computers. In other words, Dell has finally entered a race to the bottom that could keep its revenue numbers in line with expectations at the expense of its future profits.
Who is to benefit from all of this? Surprisingly, that other technology bellwether, Intel (INTC), may be in a good position to clean up. Although competitors AMD (AMD) and National Semiconductor (NSM) are winning market share on the low end, the sheer volume of cheap PCs being sold means more sales for all three chipmakers. In addition, Intel has cut costs significantly over the past 18 months, so that it is far more able to remain profitable even if its product mix favors cheap PCs.
There's only one solace, if you're a regular investor in technology stocks. Remember that the current market is in a seasonal correction, not a tech stock crash. "I'm pretty happy today," says Landis. "I always liked sales."
Jaffe writes about the markets for Business Week Online
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