Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: stock bull who wrote (130316)	6/2/1999 12:10:00 AM
From: Gold Beach	Read Replies (2) \| Respond to of 176387

Stock Bull: <The box business is a tough one.> Recently I received an article in the mail from Edward Jones. Their article entitled "Follow the Bandwidth Rainbow" suggests that technology is evolving major emphasis from PCs to Communications Networks. They say that the Internet is changing the PC from a computational device to a communications vehicle. My interpretation of the article is that bandwidth is the new scarcity and thus companies that resolve that problem are the ones to own stock in. They suggest that Intel, Microsoft and Dell will benefit to a lesser degree from the paradigm than other communications-oriented companies.

To: stock bull who wrote (130316)	6/2/1999 12:11:00 AM
From: kemble s. matter	Read Replies (1) \| Respond to of 176387

stock bull, Hi!!! FURTHER CONSOLIDATION??? RE: The box business is a tough one...Just ask COMPAQ And, I see DELL making it a very very very tough one for all the others...Further consolidation perhaps? J 02:52pm EDT 25-May-99 PaineWebber (Young, Don 203-978-9100) CPQ HWP IBM DELL GT PC Hardware PaineWebber Don Young RESEARCH NOTE May 25, 1999 Compaq Computer Rating: Neutral (CPQ-$25.06) COMPAQ: GIVING UP? IS THE DOOR OPEN FOR DELL? CONFERENCE CALL WED, 11 AM WITH CHANNEL EXECUTIVE -- SEE PW REP FOR DETAILS KEY POINTS * Two weeks after Compaq's new distribution announcement, we are more worried about the action and what the strategy may signal. * It appears that Compaq has completely dis-intermediated the dealer while greatly enhancing the distributor's position (at least the four distributors that were selected). Probably directly attributable to Compaq's actions, there has been a wholesale exit from the hardware dealer business as displayed by Entex and GE ITS recent divestitures. The dealer "touches" the customer - the distributor does not. Because of Compaq's actions the dealer will be less loyal. * The strength of the Direct channel model is the integration of the brand and the channel as Dell ($36.13)(2) & GTW($61.44)(3) have so successfully done - this is a move in the opposite direction. * We are lost to explain this action beyond Compaq management giving up on establishing an efficient distribution model on their own and instead turning to the distributor for that role. We believe Compaq will pay the distributors 1-2% of revenues for handling the product and is hoping this "simplification" will pay back in higher channel inventory turns. We estimate that Compaq has to reduce current channel inventories from 4 weeks to two weeks to justify this move. And that assumes Compaq does not lose any sales through the dealer channel (unlikely). * We believe this distribution function is too important and an integral part of the value-added chain in the PC business model to be outsourced. To put it bluntly - Dell does not use distributors for system sales and never will. * This Compaq action also creates a temporary channel inventory problem. There is now a need to liquidate all the inventory that was in the dealers hands. One week of channel inventory is equal to 8% of sales in the quarter with Compaq wanting to reduce another 2 weeks from channel inventory over the next few quarters. If the channel inventory reduction is achieved by the August 1 implementation date, Compaq could undermine its North American quarterly sales rate by 15% or over $500 million ($.05/share). * This also creates the opportunity for the dealer to shift his allegiance to the Direct channel. The dealer no longer has a vested interested in promoting Compaq product sales - the dealer is being pushed out of the hardware business. The dealer is free to provide his service capabilities to Dell customers and be viewed as less of a threat by Dell since the dealer has little financial dependency on Compaq hardware sales and is less likely to try to substitute Compaq for Dell product. Compaq has just opened its entire dealer base to Dell. * This creates a long term threat that the distributor channel will eventually be in the position to dis-intermediate Compaq. If the essence of a PC company is logistics and Compaq has outsourced a big part of logistics to the distributors - the distributors can eventually cut out Compaq. * We remain concerned about the outlook for PC hardware industry. We believe these recent distribution moves by Compaq are a step in the wrong direction, will aggravate the already poor industry pricing environment and potentially set-up Compaq to lose control over the distribution channel. We doubt HWP & IBM will follow Compaq on this move. * What should Compaq have done? We would have been more comfortable if Compact reduced its dependency on distributors for the logistics and distribution of its products. Be more Direct. Direct to the Dealer & VAR. Direct to the end-user. * We are maintaining our Compaq estimates for now - but there is risk that PC sales could be reduced by 8% or more in the June quarter if Compaq moves quickly to liquidate dealer inventories. However, we believe Compaq shares are not trading on the basis of near term earnings. And our concerns over this new distribution strategy are more strategic and longer term in nature. We continue to recommend investors under-weigh the PC hardware group.