Dell Becomes Just a Trade

If you are small and can gain market share even in difficult economic times, you have that as a protection, as Dell did in the 1990s. But once you are the largest player in the market, you must look elsewhere for growth. That's what Dell did a few years ago.

Dell sells nothing proprietary. It just used to market well by driving prices lower. But this quarter, even Dell said it had to pay Intel (INTC - commentary - Cramer's Take) more than expected, and that shows that the jig is up for Dell.

Masking the Core Problem

Dell always sold monitors to go with its PCs. It made threatening moves into Hewlett-Packard's (HPQ - commentary - Cramer's Take) breadbasket when it started to sell Lexmark's (LXK - commentary - Cramer's Take) printers. But H-P invents and sells its own printers and collects a long-term annuity with its printer cartridges and supplies.

Dell sells another company's products, someone else's stuff, as it always has. In that regard, it is just like Amazon; it spends nothing on research and development. It assembles or resells all that it offers to its customers. When you don't sell anything proprietary, you can lean on your suppliers for volume discounts only so long before that option is used up.

Dell sells Dell products. But inside are Intel chips, Microsoft software, etc. It is an assembler, not an inventor, selling other people's computer equipment, TVs and MP3 players. Nothing new there.

A Third Bad Quarter

Layer poor service on top of the core issue of technology price deflation, and you have a company with a problem. Worse, Dell cut prices dramatically to take further market share in international markets, its one remaining growth opportunity! Dell's second-quarter revenue rose by $600 million over the comparable quarter last year, but its cost of revenue rose by $1 billion. Those are not winning numbers, and this is a problem unique to Dell; witness Hewlett-Packard's strength.

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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.