Roger and All: DELL should be a good short!
interactive.wsj.com
Monday, March 9, 1998
Out of Control
By Alan Abelson
New world disorder?
It may be an early outbreak of millennial madness.
Or perhaps some of that evil stuff Saddam has stored in his Pestilential Palaces has been seeping insidiously into the atmosphere.
Or, conceivably, the enormous quantity of bank loans in Southeast Asia that are suddenly underwater could be causing oceanic turmoil so severe as to trigger grave ecological disturbances.
....
The detonator of the Intel blowup was the company's warning that current-quarter profits would be disappointing. This wasn't the first and, most emphatically, won't be the last such warning to come from Corporate America (indeed, Motorola echoed Intel's sentiments the very next day, and its stock suffered a more modest, but still painful, market reaction).
From all indications, the fallout from Asia and some plain old garden-variety woes at home like overcapacity and margin squeeze are taking a much more drastic toll on a number of companies than Wall Street chooses to acknowledge. That's very considerate of Wall Street, but it also makes certain a steady spate of rude surprises, as the roster of outfits publicly lowering their expectations expands, maybe even exponentially, in the weeks ahead.
And the announcements, alas, seem to be growing not only more numerous but also more gloomy. As witness Compaq's melancholy disclosure late Friday afternoon. The company predicted that first-quarter sales would be flat and that earnings wouldn't be much more than break-even, blaming brutal competition in the commercial market for PCs and clogged inventories in its distribution channel. By way of remedy, it vowed to slash prices and step up promotion. Which means that margins are due to absorb even nastier hits.
Nor does Compaq anticipate relief any time soon. To the contrary, the company's financial chief glumly deemed the outlook for the second quarter as "cautious." Which translates from the corporatese as "pretty awful."
Moreover, in a subsequent conference call, Compaq fingered the high end of the commercial PC market as the site of the trouble. That shapes up as strictly negative for Dell Computer. For the company's many avid advocates on the Street have been insisting that Dell was shielded from the problems besetting rival computer makers because, they claimed, those problems were concentrated in the low end of the market. At the very least, as one canny observer remarked, the dumping of huge inventories of Compaq PCs into Dell's market niche bodes extremely ill for Dell's prices, its revenues, its margins and, by extension, the multiple on its stock. Significantly, Dell's shares cracked badly in after-hours trading on Friday.
This rash of ugly news and dire prophecy in the tech sector somehow doesn't strike us as particularly bullish for the market generally, if only because the techs have so prominently been in the vanguard of this year's sprint upward, as they have for most of the great advance the past three years.
One nifty measure of how spirited a rise tech stocks enjoyed P.I. (pre-Intel) is that the market value of Microsoft has swelled by $40 billion since the beginning of 1998 -- which is more than GDP will likely increase in the first quarter, assuming 3% growth. Put another way, Microsoft has added more in market cap in a bit over two months than the $7 trillion economy of the U.S. will add in the opening three months of the year.
That astounding calculation comes courtesy of Bill Fleckenstein, the bloody but unbowed proprietor of RTM Fund, a hedge fund that is mostly short tech stocks. Bill was the subject of a Kate Welling Q&A last fall and, a quick review reveals, was quite bearish on Intel, Dell, Compaq, et al., for pretty much all the right reasons. Bill, however, has been a prophet without profit, as big investors paid more heed to "themes" and "momentum" than to what's happening in the real world.
No masochist, Bill doesn't derive the slightest bit of pleasure from getting killed by the market. Yet he deserves a salute for resolutely proclaiming fact when all about him were doting on fantasy. Kate phoned him late last week to offer a pat on the back and, more to the point, ask what he thought now.
He's still bearish on most techs, unequivocally on stuff like Compaq, Gateway, Dell, Intel and other chip makers, although he's wary that the portfolio pack will decide that with the stocks down, it's time to buy without stopping to reflect, even for a moment, on why they're down.
He reiterates some of the points he made in the October interview. Among the more telling is this: PC market penetration is now 40%-45%; saturation will probably be reached when 90% of households own a computer (that's what constitutes saturation in TV sets). Selling prices six months ago averaged around $2,000; they're now at $1,200 and six months from now will have declined to $1,000. Okay?
Let's say market penetration in PCs reaches the 90% level nine months hence. With the average selling price half of what it was when penetration reached 45%, a reasonable inference is that unit growth will be accompanied by virtually no revenue growth. And -- to be generous -- zilch earnings growth.
What's true of computers is, as Intel's slump demonstrates, equally true of chip makers and, for that matter, everything else that goes into a PC.
Events are finally vindicating Bill's marketplace analysis. Who knows, in the fullness of time, maybe his shorts will be vindicated as well. |
