NEW YORK (CNNfn) - Dell Computer Corp. over the past 10 years has established a reputation as one of the leaders in desktop computing and the clear leader in direct sales. Now what?|
That's the question Wall Street was debating Friday after Dell, the world's second-largest supplier of PCs, said sales in the coming year will grow roughly 20 percent, which is well below its historical growth levels.
For the executives at the Round Rock, Texas-based company, which expects to log about $32 billion in total sales this year, the answer is in a more profitable product mix. They say the company already has been focusing on products such as enterprise servers and storage products, notebook computers and IT services, and they plan to become more aggressive in those areas moving ahead.
Besides, they say, 20 percent growth out of a company Dell's size is nothing to be ashamed of.
"Twenty percent is significantly faster than we expected for the overall market, and 20 percent growth for a $32 billion company is relatively unprecedented," Michael Dell, the company's founder and chairman, said in an interview on CNNfn's Market Call program Friday. [439KB WAV][439KB AIFF]
Still, Dell's fortunes rely heavily on the desktop PC, which is the foundation on which the company was built and from which it derived roughly 52 percent of its third-quarter revenue.
And the desktop PC market, particularly among corporate buyers in Europe, has softened recently and is without question slowing from its historical growth rates.
Some market watchers say Dell's lower growth targets for the current year signal an even weaker desktop PC market than previously thought.
Others are worried that Dell moved too slowly away from the business model that worked so well during the PC heyday of the 1990s, making its stock one of the decade's best-performing. That could cause the company to stumble as it scrambles to adapt to a fast-changing environment, they say.
For example, Gateway (GTW: Research, Estimates), which runs second to Dell in direct PC sales, has gotten kudos from the Street for its "beyond-the-box" strategy, which focuses on sales of non-PC products such as Internet services, financing, computer training and Internet-access devices.
Income from non-PC products was more than 50 percent of income in Gateway's third quarter, which some analysts say helps insulate the company from the vagaries of the PC market.
Dell's cross-state rival Compaq (CPQ: Research, Estimates), the world's leading supplier of PCs, and Hewlett-Packard (HWP: Research, Estimates) also have shifted their business strategies to adapt to the changing environment, focusing on servers and introducing Internet appliances and handheld computers.
Slowing market could weigh on stock
The maturing PC market and Dell's heavy exposure to it make it imperative that the company execute strongly on its high-margin strategy. And some think the company's stock could continue to fall under pressure as investors assess whether or not it will be able to do so.
In afternoon Nasdaq trade Friday, Dell shares were down $5.19 at $23.19, an 18.3 percent decline. At that level, they stood 61 percent below their 12-month high of $59.68.
"The compression in the valuation discounts the slowdown in secular growth rate for Dell," Piper Jaffray analyst Ashok Kumar said in a research note Friday. Though he maintained a "buy" rating on the stock, Kumar said the stock may not have reached its bottom on a sustained basis.
"We need a lot more time and volume to reach that conclusion," he said.
Overall, the reviews of Dell's most recent quarterly results and the outlook for the company among analysts were mixed.
Some, including Banc of America's Kurt King and Morgan Stanley's Gillian Munson, cut their ratings, citing slowing PC growth and increased competition. Others, including Kumar and Merrill Lynch's Steve Fortuna, held steady, taking more of a wait-and-see attitude, giving the company a chance to show what it can do.
In an interview on CNNfn's Before Hours program Friday, Fortuna, who has a "buy" rating on Dell, said a downgrade of the stock at this point "is not a prudent thing to do." He said he warned investors days ago that Dell would likely lower its growth targets for the coming year.
"We went out with a call and said that we'd be cautious about buying the stock in the low 30s, because there's another shoe to drop," Fortuna said. "And in fact, that shoe dropped last night. We now view the story as being relatively clean. And I think they now have a base upon which they can build for the long-term. It's important to understand that the opportunity set for Dell longer term really has not changed very much."