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

To: Mohan Marette who wrote (98666)	2/13/1999 2:43:00 PM
From: Jock Hutchinson	Read Replies (3) \| Respond to of 176387

I don't think that my assumptions are that far fetched. Until now, Dell has had a "Goldilocks" ride in a "Goldilocks" economy. It is, and will continue to be a great great company, and Michael Dell is rightly regarded as an American giant. Now for the assumptions: It is real clear that the average selling price per unit is going down. It's going down so quickly, that a fair guess for maintaining revenue would be a 20 percent growth in unit sales. It could be even higher. Thus, the industry average would actually result in lower overall industry revenues. Even if Dell doubles the industry average, it still only leaves Dell with a top line growth of 20% yearly--impressive, but not the sort of thing that justifies its current price. Clearly, pricing is firming and about to climb in the DRAM industry. This can only mean lower margins for Dell. You need to go back to '95 to see what kind of effect increasing DRAM prices had on Dell--and it surely didn't have the PE ratio it currently has. Even more ominous is the fact that the "Dell Model" has never been tested during periods of component shortages. In such a time, the "Dell Model" may turn out to be a shop of horrors as prospective customers may be unable to have their orders filled on a timely basis, or (more likely) Dell will be forced to pay near exhorbitent prices for scarce components. Again, this means serious impingement on margins. If I am a corporate customer who is ordering over the Internet, (and thereby extracting the lowest possible price), I now have a much better (although not as good) choice. I can select from a vastly improved CPQ site--and if I am CPQ, I will engage in intense price competition to play "catch up" with Mike Dell's jaugernaut. Price competition means reduced margins as well. Now we get into the area of folks on this thread expecting a lot of big purchases for Y2K. (Actually it will be lots and lots of small purchases, since it is the small business that is less Y2K compliant than the large business.) And Mr. Greenspan has done his best to lower rates in order to ease the credit crunch for small American businesses to obtain credit to upgrade their systems. But this phenomenon will only last so long, and we are clearly approaching the point where it is apparent that interest rates will need to increase--thus lowering the effective PE ratio for all stocks. Indeed, were it not for the Y2K infusion, it is very possible that America would be headed for a recession and certainly slower growth. But for the time being it would appear that Dell is benefiting from a host of Y2K upgrades. But the problem with Y2K is that it will introduce intense cyclicality into the economy, the likes of which the "Dell Model" has never encountered. Specifically, after the Y2K upgrade bubble, we will most likely see significantly less sales, and that sort of cyclicality is much more difficult for the Dell model to work with. Then we have people on this thread trumpeting Dell's entry into the storage market--which is clearly an area of significant growth. However, storage is also just as clearly an area of far greater competition, lower margins, and much greater cyclicality. Thus, once again, Dell will began to be perceived as a cyclical stock--one not deserving of its current valuation--7 times sales--for a company that is selling a commodity product. Mohan: Bill Fleckenstein I am not. My family is truly grateful to Mr. Dell for the money he has made us. But I for one feel that the party is over for Dell as a "Rocket Stock", and in the near future, the traders will prevail.