Dell's Miss Not That Shocking
08/29/08 - 01:26 PM EDT
Alexei Oreskovic
Three months ago, Dell's(DELL Quote - Cramer on DELL - Stock Picks) stock soared after investors jumped at signs that the PC maker's comeback was paying off.
On Thursday, the consensus on Wall Street was that Dell's revival has veered off track, and the company's share's plunged more than 13% to $21.92. Funny thing is, the two quarters were not all that different. Dell beat Wall Street sales estimates by some $400 million in each of the past two quarters. In the first quarter, the revenue beat was enough to cause jubilation among Dell fans. After several years of looking like a has-been, Dell proved that it could rebuild demand for its products. It wasn't until Thursday's second-quarter earnings report that investors noticed the dark side of the growth: Dell has been aggressively cutting prices of its PCs -- too aggressively in the second quarter, according to CEO Michael Dell -- causing a frightening erosion in the company's gross profit margin. In the second quarter, Dell's gross margin slid to 17.2%, vs. 20% at the same time last year. JP Morgan analyst Mark Moskowitz called the margin drop "a stunner," while BMO Capital Markets analyst Keith Bachman labeled Dell's second quarter " a big step back." Of course, the gross margin results one quarter earlier showed the same forces at work, and management noted then, too, that the company had cut prices too aggressively. But with Dell's net income plunging 17% to $616 million in the second quarter, the margin decline is now too damaging to ignore. "Dell talked repeatedly of share gains, yet demonstrated a conspicuous absence of profits to show for it," Bachman wrote.
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