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

To: Mr. Aloha who wrote (44516)	5/22/1998 8:55:00 PM
From: Jack T. Pearson	Read Replies (2) \| Respond to of 176388

Would Dell's entry into the low cost PC market be good or bad? I am not sure that I agree that if Dell sells low cost computers via the internet that it won't do much for the bottom line or that margins are paper thin. I think we have incorrectly assumed that because the low cost PC market might be of marginal benefit to traditional PC vendors, it would be of marginal benefit to a company that sells direct. Consider that the actual cost to a company like Compaq, IBM, or HP of distributing a PC is the same whether there is a 400MHz processor, a 10GB HD, and 128MB of RAM in it or there is a 166MHz processor, a 2.1GB HD, and 32MB of RAM in it. Since Dell doesn't have to pay the distributor and retailer costs and profits for getting the PC to the consumer, most of what Compaq, IBM, or HP pay out would, at Dell, go to the bottom line. Let's assume that these distribution costs are about 10% of the average sales price of $2,400+. For sub-$1,000 PCs it may amount to 24+% of the price! Furthermore, Dell customers would get the latest technology for the price, not something that has been in the channel for several months. That is probably worth a 2%-4% higher price. Supporting this market could be more expensive than supporting the enterprise market. Let's assume that added cost runs 4%. In sum, Dell would have about a 22%-24% margin advantage over those who sell low cost PCs through traditional channels. Should Dell jump into the low cost PC market? Where do they get the biggest return for the next $ invested? As long as capacity at Dell is limited, they will concentrate on expanding server, workstation, and laptop sales, where margins are better (Notice however, that for the reasons outlined above, Dell's distribution advantage at the high end could be down to 5% or less!) If the above is true (challenge me, please), then ask yourself the following questions: What is Dell planning to do with all of the manufacturing capacity they are adding? If they do market low cost PCs, will their margins go up or down? If they market low cost PCs, will their earnings/share go up or down? Which way will the stock price move if the P/E doesn't change? Mr. Aloha, does this qualify as "thinking."