Dell Becomes Just a Trade

Michael Dell is clearly a very smart guy. As everyone knows, he dropped out of the University of Texas to pursue his vision of eliminating the middle-man retailer, building computers to order and becoming a billionaire.

He knew when to bring in professional managers, older than he, to manage years of explosive growth in the late 1990s. They built Dell (DELL - commentary - Cramer's Take) into a behemoth with the largest PC market share in America, currently hovering around 32%. And therein lies the key problem facing Dell today.

Mr. Dell, still chairman and barely past the age of 40, also knew when to pass the CEO buck to Kevin Rollins. It is Rollins who now must bear the brunt of the reality that Dell is no longer a high-growth company. It is Rollins who must stand before the investing public in repeating quarters of earnings disappointments and offer up his apologies and excuses.

Now the Securities and Exchange Commission has taken an interest in some unclear aspects of how Dell reports its revenue in an "informal investigation." (I guess that means the investigators will not show up wearing tuxedos.)

What the SEC is after must be clear to someone, but it wasn't made clear to investors on the earnings call on Aug. 17, even though the inquiry is not a recent development. Of course, the announcement was news to investors and the financial community. Management announced the news on its conference call last Thursday, infuriating analysts who follow the company and who hadn't previously been told.

Running in Place

If you are a short-term investor, often you only see the bark on any quarter's earnings tree. You lose focus and don't even see the long-term picture that is the forest surrounding that tree.

Dell has had a serious problem for many years that even Michael Dell couldn't solve if he resumed the role of CEO: technology price deflation. If PC prices dropped by say, a third, then you would have to sell 33% more machines or accessories just to run in place and match last year's revenue. (The average Dell PC sold for $3,000 several years ago; according to my latest Dell catalog, it's less than half that now. The customization factor makes it tough to nail down exact figures, but even with charges for add-ons, average selling prices are lower than they were when Dell sported higher growth.)

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At the time of publication, Lappin had no positions in the stocks mentioned, although holdings can change at any time.

Joan Lappin, CFA, is chairman and chief investment officer of Gramercy Capital Management Corp., a registered investment advisor based in New York City, which she founded in 1986. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Lappin appreciates your feedback; click here to send her an email.