Tippet- When you ask Dell bulls to look at the "long-term trends in the
industry"...how come you never mention:
(1) Sales are consolidating to the top 5 players (IBM, Gateway, Dell, Compaq,
HP) at the expense of all the rest..this has been going on for quite some time..white
box manafacturers and smaller players losing share over the last many
quarters...some manufacturers (Tulip, Siemens, etc) have quit manufacturing PC's
altogether...
Internationally, consolidation has been occuring at a rapid rate..
john,
Consolidation is a real phenomena. No doubt about it and direct has gained market share recently. What I don't understand is why these are necessarily bullish developments? To me these seem to be signs of what was a growth industry coming into a certain maturity. The strong players have certainly been identified, though there are a few upstarts around. But let's look at a couple of issues here.
First recent announcements by a couple of the major players.
IBM lost a ton in the PC portion of the business -- not a fact we would know anything about unless new guidelines hadn't required them to disclose how they were doing. To be sure, IBM hasn't executed well and probably can't in this area, but they are looking elsewhere for profits. CPQ had the cover of the DEC acquisition to help their results, yet still had a quite poor showing with very little revenue growth. Now the distributors are unarguably in decline. You will say that direct is eating their lunch, but if so then the two top direct companies ought to be smoking, seeing accelerating growth in revenues -- they are not. The growth in earnings is still impressive -- don't get me wrong -- but the direction (this is the current snapshot and as others contend, that is all it is) is not towards an acceleration in earnings from the last two quarters. Put this together with rapidly declining ASPs and I personally believe a real deceleration for revenues and earnings is upon us. See further comments below.
(2) ASP have been falling for quite some time...this is not a new phenomena..Dell
has proven that it can grow revenue/earnings at a rapid rate in such an environment..
This is partly true, john. I think a better way to put it is that the price of computing power/$ has seen a constant and rapid decline for the past 4 years. However during most of the new releases of the newest x86 machines, the ASPs have fallen rather slowly from around 2400 to 1800 or so. Now, recently there has been a very rapid decline with DELL keeping his rather high ASPs in contrast to the industry as a whole -- admirable and good for last quarter's profitability, but is it sustainable -- especially if business demand slows a tiny bit? I don't have all the answers on business demand, but a huge slowdown at the distributors should have already pumped the direct sellers, IMO, but it hasn't -- or perhaps they have already gotten the one-time shot in the arm coming from the move to direct?
(3) PC's have been considered a "commodity" for quite a while (by many)..this is
not a new thought/observation...
(4) Dell has had (what bears consider) a high PE for quite a while..
Re (4) Yes and high with respect to DELL's historical PE as well. OK to pay a high PE for high growth -- what is the future direction for DELL? Accelerating growth or decelerating growth? Some have said we must look at 12 month rolling average -- and that's fine, taking the long view, but if growth declines it may be too slow in helping you make an investment decision, IMO.
(5) Compaq, IBM and others have been implementing their "direct" PC models for
many, many quarters now, but, by all appearances, have come nowhere close to
closing the gap on Dell....IBM was so successful last year that they lost $1 billion
dollar making PC's with their "new" model...IBM has shown the occasion desire to
win bids at all costs, even at the risk of losing lots of money....of course, if IBM
would continue this strategy over many years, it would have a damaging
effect...However, there are clear signs that IBM wishes to do just the opposite: exit
the business altogether..
(6) The PC business has always been competitive....it is not newly-competitive...
Many of the bear arguments have been in existence, in fact, during Dell's rise in the
past 2-3 years....
However, I rarely see bears acknowledge this (as you put it) long-term trend: the
trends (I listed) have been in existence for quite a while, during which Dell's stock
price, revenue, and earnings has zoomed up the charts...the story in the PC industry
has not really changed all that much...Y-O-Y Revenue growth has indeed slowed
(industry-wide) from several years ago, but unit growth has not (much).....in fact, it
looks like revenue growth (this year) will be better than last....
What has changed is that Dell is now growing revenue and earnings in the 40's
(instead of the 50's)...the stock price has had to adjust for that...but consistent 40%
growth will still get you pretty darn good stock appreciation in today's
markets....Dell will continue to appreciate at a nice clip...not at 200% or 100%, but
at a nice pace nonetheless....
Finally, bears continue to dismiss Dell's expansion into server, workstations,
storage, E-commerce and other areas...these areas are providing very nice growth
opportunities, indeed,....PC's are becoming a smaller % of overall sales going
forward.....
regarding rates of growth see my comments above. Re growth into servers, workstation, storage and competition. DELL has kicked butt in PCs -- no doubt about it and hats off to DELL, but while there has always been competition in the PC biz the character of it is changing because of the very consolidation that you cited. Now the big players have done a little of what you just said and are starting to give up to focus on their more established an profitable businesses. DELL may be the winner in what ultimately turns out to be a very low margin business. Where competition is a major problem for DELL is as it tries to enter businesses where other companies are firmly established and entrenched and now what they are doing. EMC is a case in point. I seriously doubt that DELL will make inroads into this market, but the larger point is -- these other markets are not new either. They have also been "growth" areas during the same time as the PC boom. They are also mature. There are vastly different challenges facing DELL in entering these markets. It is by no means a slam dunk .. DELL moving into these markets fighting the companies already well-established in them. I think DELL's phenonmenal growth rates are history.
I wish you the best, but I think the long term trends mean DELL must literally reinvent itself in short order and I think the odds are againt them, especially if we face a near term economic slump -- which I think we will. |
