Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Freedom Fighter who wrote (71028)	11/27/1999 1:29:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 132070

Wayne, I'm aware that the majority of analysts on Wall St. use such models [DCF of FCF] ... Unfortunately, most don't! If they did, then most tech companies would have strong sell ratings. Try repeating my analysis with SEBL or QCOM to see what I mean. I don't think it's fair to characterize Dell as a technology company. I view them as a marketing/assembly/distribution company. They parlay the R&D of the likes of Intel and MSFT, but Dell's R&D spending is virtually nil. In that sense, they are much less risky than true technology companies like LU or INTC. As I see it, the risks to Dell are two-fold: first, will the PC cease to be a high-demand product? Current IDC estimates are that the total PC market will grow at around 15% for the foreseeable future. Nevertheless, things can change in a heart beat. Second: can Dell migrate its business model to other high-growth products? We are beginning to see that strategy unfold as they move into servers (growing at nearly 200% per year), mass storage, and wireless connectivity. So it seems that Dell is well-aware of this necessity. A not insignificant portion of Dell's free cash is used to buy back exercised options in order to avoid dilution of the shares. I believe you should adjust the free cash flow down to reflect those repurchases or lower the growth in per share progress to reflect the dilution. Good point! The real problem, though, is not the share buy-back (which is really a tax-advantaged DRIP), but the issuance of employee stock options with dilution to shareholders. The way I view them, options are real expenses that the company manages to shift to investors, so they don't appear on the income statement. On the flip side, the company also realized a lot of unreported "earnings" through the sale of put options. These transactions are enormously complicated, and I have no idea how to unwind them. Two things should be clear. Dell's earnings overstate economic profit to the extent of the value of the options issued, and Dell's earnings are understated to the extent that they realize economic profit from the sale of put options. I once spent an entire weekend trying to unwind this stuff, but unfortunately, SEC and GAAP accounting rules do not require explicit disclosure of the information required to back these effects out. I think companies like Coke, PG, and other such consumer franchises are better suited to models that make use of long term growth assumptions. Potential growth is much more certain in those companies, which is why I would use a lower risk premium. The choice of a 15% risk premium was used to reflect the uncertainty of future growth. TTFN, CTC

To: Freedom Fighter who wrote (71028)	11/28/1999 10:24:00 AM
From: gnuman	Respond to of 132070

Wayne, re: Dell I think your analysis is right on. I like to compare Intel and Dell, leaders in their respective segments of the PC business. Intel, with a virtual monopoly on CPU volume, still finds it needs to accelerate both price learning curves and product introductions to grow and create new markets, (ie; the Value Segment). While unit volume may increase significantly, the impact is a lower revenue growth rate in the core business. Dell, with much lower share of market, has a reasonably good business model which to date has grown share and revenues much faster than the competition, (although at decreasing margins). But I have to believe that as share grows they look more and more like Intel. Steeper learning curves on systems to grow/maintain share with resulting lower revenue growth rates. And as their model is copied by the competition, their uniqueness starts to disappear, making it even more difficult. In the PC business, leadership can turn over night, as evidenced by Compaq. JMHO's