A Contra Perspective On Dell
It seems there is no lack of Wall Street experts giving us their opinion on Dell. People buy less PC's. The future is one of portable devices. Dell's business model doesn't work any more. Dell is getting beaten by HP. Dell's customer service is a wreck. I've heard them all on CNBC. How about a reason to consider buying Dell?
Dell may sell alot into the consumer market, but the margins and profits are much greater in the corporate markets. In the corporate market, Dell typically provides excellent customer service and coddles its customers, the likes of which include gargantuan companies such as Motorola, Wal-mart, Kroger and Ford. Those customers don't call an 800 number for help. They have an assigned team of sales and consulting executives who live day to day with their client to anticipate their every whim. People are buying less PCs? Well, Dell's top line number showed good growth for a $60 billion goliath dealing with the law of large numbers. In 2001 there an estimated 500 million PCs in use globally. By the end of 2007, that number is estimated to grow to 1.2 billion. That doesn't even include the regular upgrade cycle corporate customers must undertake to stay current with their ISVs, networking requirements, issues of compatible, break/fix costs, support costs, etc.
Without belaboring the point, Dell's business is not going away and neither is Dell. By most measurements, Dell is the largest hardware manufacturer in the world. Larger than HP and much larger than IBM which are both more diversified in their revenue streams. Now, during a downturn, Dell's stock will obviously take a hit as it has. But, before everyone starts squawking about Dell's demise, maybe they should look at all technology. Apple, Broadcom, AMD, Qualcomm and others are being crushed. From a business perspective, what happens during a downturn? The strong get stronger and the weak go under. Dell has nearly $10 billion in cash, gross profits of $10 billion, no debt and is the largest computer manufacturer in the world. It has nearly $5 billion in free cash flow and an enterprise value/free cash flow of less than ten. Instead of squawking why Dell is finito, the smart money is likely backing up the truck here or will soon be. I believe there is more downside but don't confuse any of this with a threat to Dell's business and don't listen to Wall Street.
Finally, a general note about consumer and small business customer service in the PC business. The facts are they are all awful compared to what one gets in a corporate environment. Here's the problem. Someone buys a PC from Dell or HP or Lenovo or Sony or whomever. The margins are likely less than $50 bucks unless you load it up with options. You can either choose to upgrade your warranty for a few hundred bucks or stay with the standard warranty. Then you go out and buy an Epson or HP printer, load up software from a thousand different companies, install peripherals from a hundred different companies, install the third party drivers for all of this and then use your Netgear router to hook it all up. So, you call Dell with a problem and ask some guy to fix it over the phone for $50 bucks profit? Huh? What do you want? A magician? The expectation levels are set too high and the business model is a losing proposition. They can help with general set up issues but people want them to solve every problem involving their PC including those which have nothing to do with the PC. Now, how does Apple get around this? Everything is made by Apple or approved to work by Apple. It is a closed system. No fiddling and no fussing. It is also the reason why Dell sells more systems in a few weeks than Apple sells in an entire year. People want choices.
While others are talking about the demise of Dell, if I were a buy and hold investor, I'd likely have been tempted to buy hand over fist on Friday at $18. There is a high probability this was a capitulative short term bottom or close to it.
Dell may sell alot into the consumer market, but the margins and profits are much greater in the corporate markets. In the corporate market, Dell typically provides excellent customer service and coddles its customers, the likes of which include gargantuan companies such as Motorola, Wal-mart, Kroger and Ford. Those customers don't call an 800 number for help. They have an assigned team of sales and consulting executives who live day to day with their client to anticipate their every whim. People are buying less PCs? Well, Dell's top line number showed good growth for a $60 billion goliath dealing with the law of large numbers. In 2001 there an estimated 500 million PCs in use globally. By the end of 2007, that number is estimated to grow to 1.2 billion. That doesn't even include the regular upgrade cycle corporate customers must undertake to stay current with their ISVs, networking requirements, issues of compatible, break/fix costs, support costs, etc.
Without belaboring the point, Dell's business is not going away and neither is Dell. By most measurements, Dell is the largest hardware manufacturer in the world. Larger than HP and much larger than IBM which are both more diversified in their revenue streams. Now, during a downturn, Dell's stock will obviously take a hit as it has. But, before everyone starts squawking about Dell's demise, maybe they should look at all technology. Apple, Broadcom, AMD, Qualcomm and others are being crushed. From a business perspective, what happens during a downturn? The strong get stronger and the weak go under. Dell has nearly $10 billion in cash, gross profits of $10 billion, no debt and is the largest computer manufacturer in the world. It has nearly $5 billion in free cash flow and an enterprise value/free cash flow of less than ten. Instead of squawking why Dell is finito, the smart money is likely backing up the truck here or will soon be. I believe there is more downside but don't confuse any of this with a threat to Dell's business and don't listen to Wall Street.
Finally, a general note about consumer and small business customer service in the PC business. The facts are they are all awful compared to what one gets in a corporate environment. Here's the problem. Someone buys a PC from Dell or HP or Lenovo or Sony or whomever. The margins are likely less than $50 bucks unless you load it up with options. You can either choose to upgrade your warranty for a few hundred bucks or stay with the standard warranty. Then you go out and buy an Epson or HP printer, load up software from a thousand different companies, install peripherals from a hundred different companies, install the third party drivers for all of this and then use your Netgear router to hook it all up. So, you call Dell with a problem and ask some guy to fix it over the phone for $50 bucks profit? Huh? What do you want? A magician? The expectation levels are set too high and the business model is a losing proposition. They can help with general set up issues but people want them to solve every problem involving their PC including those which have nothing to do with the PC. Now, how does Apple get around this? Everything is made by Apple or approved to work by Apple. It is a closed system. No fiddling and no fussing. It is also the reason why Dell sells more systems in a few weeks than Apple sells in an entire year. People want choices.
While others are talking about the demise of Dell, if I were a buy and hold investor, I'd likely have been tempted to buy hand over fist on Friday at $18. There is a high probability this was a capitulative short term bottom or close to it.
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