Speaking of DELL ...
[In posting #1542, the words in the fourth paragraph, "does necessarily mean", should have read "does not necessarily mean". Also, the attempt to italicize the phrase "sine qua non" failed, but succeeded in, unintentionally, italicizing the entirety of the remainder of the posting.]
My concern with hi-tech companies, consistent with Graham,
Buffett, and Lynch, is the disconnect between revenue growth and
profit growth, in industries where commoditization inevitably
leads to falling prices, and hence, falling margins. This is a
great boon to consumers and the economy in general -- but not
necessarily a boon to shareholders of hi-tech companies.
As long as the products in question keep evolving to ever-higher
levels of complexity (and therefore greater margins), companies
on the cutting edge of their technology have a *chance* of
continuing to turn out high margin products, and therefore
eventually justifying on economic grounds a high p/e at the time
of purchase. It's no guarantee, but at least it's a case that's
defensible on economic grounds.
5 years ago, I looked long and hard at both Dell and Gateway. I
couldn't really decide between the two, so I didn't recommend
either. I knew about Dell's competitive advantage in terms of
its made-to-order system, which keeps inventory at a minimum, and
therefore losses on falling inventory values to a minimum. But,
IBM, Compaq, and Gateway, among others, knew the same thing --
and there's no way to patent a made-to-order system.
As it has turned out, Michael Dell, like Steve Case of AOL, has
defied all historical experience (so far), and managed to
continue growing profits at the same time that larger
competitors, who have much deeper pockets and are free to copy
what they are doing, still lose money doing essentially the same
thing.
Recently, the WSJ reported that a company called Microworkz is
selling a full featured PC (300 MHz Cyrix cpu, 32 MB RAM, 3.2 GB
HD, a "suite" of Corel software, plus 14" color monitor) for *$399* --
supposedly with a 13% profit margin. To top it off, a one-year
subscription to the ISP Earthlink is thrown in. Looked at
another way, if you want the latest version of Word Perfect and
Corel Draw, plus a year of Earthlink, they will pay you a few
dollars to accept the 300 MHz PC.
How does Microworkz do it? Well, as the article hints, suppliers
throughout the PC food chain, from Cyrix to Earthlink, as well as
the unbranded components in the middle that are being assembled
in the back room of noodle shops throughout East Asia, are
dumping product into the developed world's only economy that
isn't either stalled or in a downward spiral.
No Capitalist can fail to greatly admire Michael Dell's starting
in a college dorm room, competing against 100's of Mom and Pop PC
clone makers, and building the same $2000 mouse trap so cheaply
and marketing it so efficiently that, aged 34, he runs a company
with a market cap that exceeds Hewlett Packard and Boeing --
combined. However, now that mouse traps that catch about as many
mice as most people need or want to catch are selling for $400,
with a year's supply of gourmet cheese thrown in, I would rather
not pay 84 times trailing earnings to be his business partner.
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