Why DELL is no longer a GROTWH stock!
NEWSWEEK magazine March 1999
WALL STREET
How High the Moon?
When good companies are bad investments
By Allan Sloan
For the past five years, Dell Computer has coined more
money than the U.S. Mint. Making even Microsoft look like
a low-flier, Dell's stock-market value has risen from less
than $1 billion in February 1994 to more than $100 billion.
Chairman Michael Dell, who's all of 34 years old, has
become one of the dozen richest people in the United
States. And there are plenty of Dellionaires keeping Michael
company. Anyone lucky or farsighted enough to have
plunked down $2,100 for 100 shares of Dell on Feb. 18,
1994, now owns 3,200 shares, worth around $256,000 at
last Friday's closing price. A 120-to-1 return in five years.
Not too shabby.
So why was there endless weeping and wailing about Dell
on Wall Street last week? Because in early February, Dell
was selling for as much as $110, almost 40 percent higher
than Friday's price. What happened? Did the company lose
money? Did its profits drop? Did its computers become
obsolete? Nope. The problem is that its revenues for the
three months ended Jan. 29 were up only 38 percent, less
than the Street expected. Only 38 percent, a figure most
companies would kill for. So even though Dell's profits per
share for the quarter were up 55 percent, as Wall Street
expected, the stock tanked. Massive selling drove it down
more than $20 a share, cutting its stock-market value by
about $25 billion.
Hello? What kind of world are we living in when 38 percent
sales growth whacks tens of billions of dollars off a
company's stock-market value? A world in which fantasies
and ridiculous expectations have driven prices of some
market favorites to the moon. Proving, once again, a point
that we old fuddy-duddies keep making over and over: the
stock of even a marvelous company can turn out to be a
less-than-marvelous investment if you buy it at an insanely
high price.
Unlike ephemera, such as Internet stocks, where you're
buying potential, hype and moonbeams, Dell is a real
company with real revenues ($18.2 billion in fiscal 1999)
and serious profits ($1.46 billion). Dell peddles
made-to-order personal computers directly to consumers.
In 1998 it sold 7.77 million machines, according to
International Data Corp. of Mountain View, Calif. But
anyone who thought that Dell's profits and stock price
could continue expanding exponentially forever was
ignoring the laws of numbers. Unless the law of gravity is
repealed, it's impossible for Dell stock to replicate its
performance over the last five years, which have seen its
stock rise from 66 cents, adjusted for stock splits, to its
current level. At Friday's price, Dell's 1.27 billion shares
were worth about $102 billion. If the stock were to continue
rising at the same rate for another five years, Dell would be
worth 120 times what it was on Friday. Call it $12 trillion.
That's trillion, with a "t." More than the gross domestic
product of the United States. More than today's value of all
the Standard & Poor's 500 companies. Even more than
President Clinton's legal bills.
Now, just for fun, let's assume that Dell's computer sales
rise at a similar pace. The company would have to sell
about 950 million computers in the year 2003. That's almost
one computer for every household in the world.
Notgonnahappen.
None of this is to say that Dell is a bad company. Or that its
stock price won't rise. But there's no way its sales,
profits—and especially its stock price—can keep rising at
the rate that Wall Street has come to expect. Let's do
another exercise based on Dell's current stock price. Dell is
currently selling at about 75 times its most recent annual
per-share profit. Using a very generous rule of thumb often
employed by growthniks, a growth stock is worth next
year's projected per-share profit multiplied by the growth
rate. So to justify a price-to-earnings multiple of 75, you
need 50 percent annual profit growth. (The math: this year's
$1-per-share profit is $1.50 next year. Multiply $1.50 by 50
and you get $75.) Get out your compounding calculator,
and you see that five years of 50 percent growth means Dell
has to earn $11 billion five years from now. That's more
than any company has ever earned.
Dell is one of the Big Four high-tech stocks that have been
major factors in driving up the S & P 500 and the Nasdaq
index over the past few years. One of the other stocks,
Intel, hit an air pocket recently, on fears of competition in
the chip business. You have to wonder how long it will be
before the other two, Microsoft and Cisco Systems, have
their own days of reckoning.
These are all very fine, profitable, rapidly growing
companies. The problem isn't the companies or the
business, but their stock prices. When your profits have to
grow 50 or 75 or 100 percent a year, forever, to justify your
stock price, sooner or later something has to go wrong. It's
like the barnyard story about the farmboy who used to lift a
30-pound calf over his head five times a day. When people
asked what he was doing, he explained that his plan was to
keep up with the calf's growth, so he would be able to lift it
when it became a full-grown, 700-pound cow. The limiting
factor got him. The same way it gets every company, no
matter how fast its growth or high its tech. And that's no
bull.
With Anjali Arora
Sloan is NEWSWEEK's Wall Street editor. His e-mail
address is sloan@panix.com. |
