Real Message in Upbeat Dell News Is Bad News for Other Tech Firms
For a day, Michael Dell looked like the hero who stopped the Great Tech Stock Meltdown of 2001.
His company’s upbeat--or at least, not downbeat--earnings preview late Wednesday helped spark a massive rally in depressed tech shares Thursday, sending the Nasdaq composite index up 146.20 points, or 8.9%, to 1,785.00.
But there was a message behind the message in Dell Computer’s announcement that it wouldn’t revise sales or earnings estimates lower for the quarter ending May 4.
Michael Dell, in a presentation to analysts Thursday in New York after the preview announcement, sounded like a man pursuing a virtual scorched-earth policy in personal computers and other businesses. It was hardly a statement of optimism about the future of technology sector profits in general.
Dell Computer, whose direct-sales model gives it a lower cost structure than its major rivals, will continue to push prices lower for computers, servers and other devices, the chief executive said. The goal is to steal market share from competitors.
Nothing unusual in capitalism about wanting more market share, of course, and there’s certainly nothing unusual about prices falling in the computer business. But in a booming economy, like that of 1999 and much of 2000, there was room in the PC market for low-cost Dell and for higher-cost rivals.
Today, with corporate and consumer demand for tech equipment far less robust, continued price cuts by the low-cost producer in the PC business mean competitors face a far greater challenge.
What’s more, Dell has its sights set on building its presence in higher-margin markets, such as for more powerful computer servers that manage large networks.
On Thursday, as Dell shares leaped $3, or 13.5%, to $25.19 in the wake of its assurance that it’s on target to meet Wall Street’s sales and earnings forecasts for this quarter ($8 billion and 17 cents a share, respectively), rivals also rallied. Compaq jumped $1.36 to $17.16, Hewlett-Packard surged $3.32 to $30.77 and Gateway rose $1.76 to $16.50.
By Friday, however, investors were having second thoughts as the message behind Dell’s message began to sink in. PC-related shares helped lead another broad decline in Nasdaq, pushing the index down 3.6% to end the week at 1,720.36.
Though Dell shares eased just 38 cents to $24.81 on Friday, Compaq slid 86 cents to $16.30, Hewlett-Packard plunged $2.02 to $28.75 and Gateway tumbled $1.81 to $14.69.
At their peak prices of the last two years, the combined market value of those four computer companies was about $380 billion. Today the market places a total value of about $152 billion on the four firms. Dell accounts for about 42% of that, with the three others splitting the balance.
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How many PC makers will be left in, say, three years? That’s what the market is wrestling with now--just as it’s wrestling with the cold realities facing other slumping tech sectors, including semiconductors and telecom equipment.
Fear is high that the casualties of weakened corporate and consumer demand will include some big names. Last week, Lucent Technologies, the telecom equipment giant that was a Wall Street darling in the late 1990s, had to go so far as to deny bankruptcy rumors.
On Friday, Motorola likewise faced panic selling of its shares on rumors it is running out of cash. Despite the company’s denials, its stock fell $3.45 to close at an eight-year low of $11.50 on the New York Stock Exchange.
Lucent’s shares, meanwhile, fell 98 cents to $6.96, not far above the five-year low of $6.75 set Wednesday.
A year ago it was obvious to many veteran investors that the dot-com craze could only end badly. But Lucent and Motorola fighting bankruptcy rumors? That idea would have been drawn guffaws from any serious investor.
No wonder, then, that the market is so shell-shocked today; no wonder every tech stock rally quickly is met by a new wave of selling.
In the PC business, the survival of the major players will depend on whether demand for computers is merely in a short-term lull, or whether the PC era is (as some insist) rapidly giving way to an era of electronic information delivery by other preferred means--the Palm, for example, or wireless phones.
The end of the PC era wouldn’t translate into instant obsolescence for the machines. It could simply mean that people would use other devices to do more of what they now do on their PC, making it less likely they would upgrade their PCs as often.
In any case, computers will still be needed, and Michael Dell naturally wants to be the one supplying them. In an interview with Reuters news service Thursday in New York, Dell was asked about the potential for consolidation in the PC business and whether Dell might want to acquire weaker rivals.
“It would not be necessarily a wonderful thing for us to acquire these organizations, because I am not sure there is a lot to be gained,” he said, pointing to other PC companies’ cost structures.
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On Wall Street, Dell clearly is viewed as a survivor. That’s evident from the valuation the market gives the stock--even though the company, while affirming first-quarter earnings estimates, won’t comment on its expectations for the full year.
A year ago, when Dell’s share price peaked around $57, analysts expected the company to earn about $1.20 a share this year. At the peak, then, Dell’s stock was valued at about 48 times this year’s earnings. That was nearly double the valuation of the average blue-chip stock.
Today, the consensus estimate for Dell’s earnings this year is 80 cents a share, according to earnings tracker IBES/Thomson Financial. For next year, the consensus estimate is 94 cents.
At the stock’s close Friday of $24.81, then, Dell’s price-to-earnings ratio is 31 based on this year’s consensus estimate, and 26 based on next year’s estimate.
Those are lower valuations than at Dell’s 2000 peak, but they’re still higher than what the average blue-chip stock enjoys. The P/E of the Standard & Poor’s 500 is around 20 based on analysts’ earnings expectations for companies in the index this year.
By contrast, see how the market treats some Dell rivals. Compaq, for example, still is expected to earn 81 cents a share this year and $1.07 next year, according to analysts surveyed by IBES/Thomson Financial. At $16 a share, Compaq’s P/E is 20 based on the 2001 estimate and 15 based on the 2002 estimate--far below Dell’s P/Es.
Hewlett-Packard’s market valuation is about on par with Compaq’s today.
Could Dell’s shares be too expensive--and its rivals’ shares too cheap? Investors could turn out to be too confident about Dell and not confident enough about the others. Or they may still be too confident about all of the players.
But in this fearful investing climate, Wall Street is opting to abide by some simple rules. When in doubt, go with the competitor that has the lowest operating costs and the best record in terms of executing a business plan.
There are a lot worse strategies in investing.
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PC Survivor?
Stock of Dell Computer has surged 42% this year from the low reached at the end of 2000, reflecting investors’ faith in the company’s ability to ride out the downturn in PC demand. By contrast, shares of Compaq Computer have surrendered most of the rally they enjoyed early in the year and are up 8% since Dec. 31. Shares of Gateway, meanwhile, have plunged 18% this year to a new multi-year low as of Friday.
Dell Computer shares (ticker symbol: DELL), monthly closes and latest on Nasdaq
Dell Friday close: $24.81
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Source: Bloomberg News
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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to http://161.35.110.226/petruno.
