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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Jim Patterson who wrote (33678)	3/10/1998 7:01:00 PM
From: Jeff lin	Read Replies (1) \| Respond to of 176387

>>DELL has the same market cap as CPQ who has 2x the market.<< On Yahoo, cpq market cap is 38.47B. Dell is 21.28B.

To: Jim Patterson who wrote (33678)	3/10/1998 7:43:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176387

Jim, I hope the following snippet fairly summarizes your position: But when push comes to shove, is a great model worth 45 times earnings? Dell the company is only a part assembler. Take that into the stock and look at the valuation. Part assemblers do not disserve astronomical Ratios. PC are just as much a commodity as the chips that go into them So, let me take your points one at a time. Let's assume for the moment that xyz is properly priced. And let us also assume that last year's earnings were around $1.00. XYZ is not expected to grow and the market prices this company at $5. Now lets compare XYZ to ABC, which is identical in all respects to XYZ except that investors expect it to XYZ save the fact that It is expected to generate $1.10 in earnings this year, and every year thereafter (i.e., a one-time growth in earnings of 10%). Can you see that the stock will be worth $5.50, or 5.5 x last years earnings, but still 5.0 x this years earnings. Now suppose that company is expected to earn $1.21 next year and every year thereafter. Now, given what I hope you've agreed to thus far, you will see that next year this company will be worth $6.05. This is the basis for the high P/E's commanded by growth companies, and that's why Dell and other rapidly growing companies are awarded such high market multiples. The second pert of your post speaks to the risk of holding such a company. Obviously, the greater the risk, the lower the price. But paradoxically, as each growth hurdle is met and the perceived risk decreases, the greater the reward for early investors. This is the basis for P/E expansion. So the question of DELL's valuation boils down to perceived risk. Risk comes in two forms, market risk, and business risk. What are the business risks facing DELL. 1. Slowdown of demand; there is no evidence of this in the near-term but things could always change. There is a potential positive here because Dell has initiated expansion in the Pacific Rim -- an area with tremendous potential once it gets its economic house in order. 2. Emergence of competitors able to out-compete Dell. Again, this is always possible, but thus far no company has been able to successfully emulate Dell's JIT manufacturing system. Thus, it appears that Dell is in a position to erode its competitors market share. I must begin to cook dinner now. There is a lot more I wanted to tell you, but it's my night to cook and the boss gets grouchy if I don't fulfill my part of the bargain. Regards, Paul