Dell an Internet company 7 DEC 98
From Austin American-Statesman, Monday, 7-Dec-98, page C4
By Christopher Grimes, Dow Jones News Service
With Internet sales averaging $10 million a day, Dell Computer Corp. may be the darling of the wrong industry.
The company's famous direct sales method has turned Dell into many analysts' favorite PC company. But is Dell turning into an Internet company, like bookseller Amazon.com Inc.?
Don't laugh. Merrill Lynch & co. analyst Steven Milunovich recently wrote of the company: "Dell should increasingly be viewed as an Internet stock, albeit one with earnings."
Michael Dell, the founder and chief executive of the company based in round rock, has said he wants 50 percent of Dell's business to come from the Internet by the end of 2000. Right now, 20 percent of total revenue is generated online.
Analysts say it is much harder to define what an "Internet company" is than, say an oil company. But investors seem to know one when they see one, as evidenced by the astronomic rise in their share prices. Amazon.com, to name only one, has risen as high as $233.12 ½ recently; a year ago, the stock was at $24.68 ¾. Some investors consider Internet companies to be the franchises of the 21st century and have discarded many of the traditional ways of valuing stocks, like price-to-earnings ratios, or P/Es.
Of course, Dell's stock has been no slouch over the past few years. Based on its closing price last week of $63.81 a share, Dell is trading at a P/E multiple of 44 times projected 1999 earnings, compared with a multiple of 19 for rival Compaq Computer Corp.
But Dell's isn't an Internet stock multiple by a long shot. Amazon based on Friday's close of $216.62 a share is trading at 215 times projected 1999 earnings.
Why the difference in how the two companies are viewed? Analysts think the market still is deciding what an Internet company is.
"I think people have a problem defining what an Internet stock is," said Abhishek Gami, a technology analyst at William Blair. "I think that's one of (the) most harmful things happening" in the market right now, he said.
Gami thinks a true Internet company "doesn't have a real-world existence." So dell doesn't meet his definition, since the company had a strong business before it began selling online. But for Merrill's Milunovich, Dell has taken "mindshare" in the Internet space-one of the virtues assigned to franchises like Amazon.com.
"You can touch and feel Dell (on the Web0 more than just ordering over the phone," Milunovich said. "In the end, it's who creates an impression in the customer's mind. The Internet is a powerful tool to create mindshare.
Given the company's present momentum, Michael dell's goal of achieving half of his sales online seems reasonable. Internet sales at Dell historically have been to consumers, but big companies are beginning to get into the act.
Dell launched its Internet sales initiative in the spring of 1996, aiming it at tech-savvy consumers. The Christmas rush of 1996 gave the fledgling program sales of $1 million a day.
But Dell's online sales to corporations and government agencies have "taken a real sharp jump in the last six months," said Scott Eckert, director of Dell's online business.
Internet sales at Dell soared from $6 million a day to $10 million a day from the second quarter to the third this year.
Eckerd said consumer sales made up between 20 percent and 25 percent of Dell's online sales in the third quarter.
"The mix is shifting to be closer to (Dell's) overall business mix, which is 10 percent consumer and 90 percent business and government," he said.
"There is a mind-shift in corporations, government and (among) consumers," he said. "In all those different market segments, the willingness (to buy online) has improved dramatically."
The company introduced "premiere pages" last year, which are secure, customized Web sites for big companies like Ford Motor Co., Boeing Co. and MCI Worldcom Inc. The sites-which number 8,500 and are expected to increase by the thousands-allow customers to order computers, get technical support and track their payment and order status online.
Analysts think Dell's online sales run short only of networking company Cisco Systems Inc.'s. but even with such a successful Internet franchise, can Dell be considered an "Internet company"?
Perhaps that's the wrong way to look at the issue. Maybe more important for investors, Milunovich said, is that Dell and Cisco could be safer ways to play a very young and volatile industry.
"Cisco or Dell may not be the sexiest way to play (the Internet), but in the near term it may be one of safest ways to play it," he said.
Dell's Eckert, who helped build the company's Web presence from scratch, said he hadn't really pondered if Dell was becoming an Internet company.
"I don't know what 'Internet company' means," Eckert said. "The Internet is a a serious business for us and a core part of (Dell). If that makes us an Internet company or not, we'll let the market decide."
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