Filed Under: ,
Tickers in this Article: DELL, IBM, HPQ, AAPL
The run-up in Dell (Nasdaq:DELL) stock since early March in the face of a less-than-inspiring outlook could prove to be a good opportunity to exit the stock. Things could get tough for the computer maker in upcoming quarters.

Of course, many investors will tell you this is no time to sell. Trading at just nine times projected 2009 earnings, the shares seem cheap. What's more, the company has $9.1 billion in cash and investments, amounting to about $4.66 a share, or almost half its market value. All that cash and Dell's low debt load give it financial insulation to withstand some hits.

IN PICTURES: 20 Tools For Building Up Your Portfolio

The trouble is, the hits just keep coming. For starters, Dell seems to have lost its competitive edge. For a long time running, its direct model gave the company such a cost advantage that it could continually squeeze rivals by cutting prices and taking market share. But these days market share keeps getting eaten away as rivals match Dell's lower prices and customers increasingly want to buy computers in stores. Last month, Hewlett-Packard (NYSE:HPQ) dethroned Dell as the U.S. PC market leader. (For more, see Recession: What Does It Mean To Investors?)

Business Model Concerns
Dell's move to a two-tier model that relies on channel partners will be a challenging transition. Cost-cutting efforts and a new go-to-market strategy may be admirable, but ultimately the company is unlikely to produce sustainable revenues and earnings growth over the next year.

Unlike peers HP and IBM (NYSE:IBM), which are buffered by a high proportion of revenues from recurring services and solutions, Dell is heavily exposed to a much less reliable PC and server hardware sales market. Except for its small service and printer cartridge businesses, Dell has drastically lower exposure to recurring revenues than its competitors.

Then There's The Economy
Just as Dell was preparing for a turnaround, PC sales fell off the cliff as the recession took hold. Earnings fell 16 percent last year. This year, they will probably plunge a lot further. (For related reading, see The Impact Of Recession On Businesses.)

Indeed, further cuts in enterprise IT spending budgets will take a toll on Dell's top and bottom lines. Remember, the company derives more than three-quarters of its revenues from business customers.

A Shift In Consumer Preference
Dell's current strategy is to push harder into the consumer market, which appears to be holding up better thanks to the growing popularity of low-cost "netbook" machines. But it's hard to think Dell is in position to make this adjustment without suffering a serious blow to profit margins. Plus, the shift to cheaper devices is a strong signal that PC buyers are tightening their belts. With job losses on the rise, belts could get even tighter this year.

Just as concerning is the flurry of new PC product offerings arriving in stores this spring. Even in the face of sluggish sales entering the slower spring and summer months, Dell recently launched its new Precision workstations and the Adamo series of notebooks, among other products. Meanwhile HP, Acer and Lenovo, not to mention Apple (Nasdaq:AAPL), are hoisting their own new models onto the market. Excessive inventories make pricing pressure a good bet over the coming quarters.

Bottom Line
Dell shares may look cheap, but that doesn't mean they are a good deal. Investors should take the money and run.

comments powered by Disqus

Trading Center