Did you guys see this:
Quant View: Dell's Valuation is Unsustainable
By Ted Murphy
Special to TheStreet.com
5/15/98 1:03 PM ET
Dell Computer's (DELL:Nasdaq) price-to-earnings multiple is now higher than Microsoft's (MSFT:Nasdaq), at 47 times 12-month-forward estimates versus 44. I find that amazing -- and unsustainable.
The PC hardware environment is too competitive for Dell to maintain this kind of a premium over the long term. Short term, I note that Dell is expected to report next Tuesday after the close. Expectations are for a strong quarter.
The chart below illustrates Dell's meteoric rise in price and estimated P/E over the last two and a half years. In the interest of full disclosure, my previous short-sell recommendation on Dell is marked on the chart. I thought Dell was expensive last July at 35. Well, now its really expensive.
<Picture: Dell chart>
PC makers face continuing price competition and relief seems likely to remain elusive. As IBM (IBM: NYSE) CEO Louis Gerstner said in an otherwise upbeat speech last Wednesday, "We're in a [PC] price war right now, and we intend to compete and protect our market share." Gerstner's sentiment is echoed by Compaq (CPQ:NYSE) and Hewlett Packard (HWP: NYSE). At some point, Dell's competitors will catch up, and Dell's valuation on earnings will contract.
I've bought 11 Dell PCs so far this year, which is a strong personal testimonial to the quality of the company and their products, but I have no loyalty towards Dell. For a given configuration, I'll take the cheapest box offered by the top brands: Dell, Compaq, Hewlett Packard and IBM.
Earnings estimates and revisions for Dell continue to trend upwards, but the rate of growth seems to be slowing. The chart below shows the 12-month-forward earnings estimates and one-month earnings revisions for Dell over the last two and a half years.
<Picture: Dell chart 2>
Dell has done a tremendous job harnessing the power of the Internet to expand their customer base and productivity. In the process, however, they've released the genie from the bottle. By providing an even-handed marketing and distribution network, the Internet will continue to act as a catalyst, driving prices on servers and high end workstations down to their marginal cost.
The table below shows the valuation and size of the largest technology companies in the U.S. I note that Dell's market cap is now 29 percent larger than Compaq Computer, which I see as a further indication of Dell's valuation being excessive.
Large Technology Companies
May 15
TkrCompany05/14
PriceEst
P/EMktCap
($Mill)Revenues
($Mill)MSFTMicrosoft88.9444.0216,54613,664INTCIntel84.5624.8137,56624,623IBMIBM125.8118.5120,35978,818LULucent71.3139.792,79528,154CSCOCisco76.0636.877,8107,298HWPHewlett-Packard70.3119.472,68944,416DELLDell95.2547.460,99012,327CPQCompaq31.5631.247,34325,466XRXXerox107.8821.935,27818,448MOTMotorola58.2531.834,81630,038CAComputer Associates58.0623.631,7054,457ORCLOracle26.2523.025,5536,679TXNTexas Instruments62.1324.724,2609,674EMCEMC44.8829.522,3073,147AUDAutomatic Data Processing66.3129.119,8224,575AOLAmerica Online87.7599.018,4462,039EDSElectronic Data Systems37.0617.218,22315,235SUNWSun42.5616.116,0619,452FDCFirst Data35.4420.715,9095,223<Picture>
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Ted Murphy (ted@pdgm.com) operates the MarketPlayer Web site. Prior to MarketPlayer, he was a partner at Equinox Capital Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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