Wall Street Runs Red as the Dell Tolls Again for PCs

Bit by bit, quarter after quarter, Dell (DELL) has built itself a Compaq (CPQ)-sized credibility problem.

Revving Down Stock drops on top-line warning

Thursday's warning by Dell that it saw its sales growing just 20% in the next fiscal year was the latest in a string of disappointments that have badly battered the company's once-formidable reputation on Wall Street. For the past year-and-a-half, investors have been lowering their expectations as steadily as an Eddie Murphy fan club. First there was sustainable 40% growth. Then there was 30% to 35% growth. Then, last month, Dell hinted that range could fall to somewhere around 25%.

So it's hard to say that anyone was particularly shocked when on a conference call Thursday following the Dell's third-quarter-earnings report, CFO James Schneider yet again lowered the company's guidance for fiscal 2002 revenue growth, this time to 20%, with "slightly faster growth" for earnings. But investors registered their weariness by sending the stock down more than 18% on Friday. Meanwhile, the analysts who cover the stock are starting to get more than a little annoyed.

That Sucking Sound

"You're getting bled to death," says Lehman Brothers analyst Dan Niles, expressing the analyst community's annoyance. "They had a chance to clean it up [last month] and get it out of the way. They should have done it all at once. Now do we just wait two months to lower to 18% growth?" (Niles rates the stock buy, and his firm hasn't underwritten for Dell.)

Michael Dell made an admirable effort to put the bulk of the blame for slowing growth on the PC segment -- he said the company was slashing prices for its computers in an effort to regain lost market share -- while highlighting the ongoing shift in emphasis toward NT servers, storage and services. But the burden on proof is squarely on Dell. Massive competitors like Hewlett-Packard (HWP) and IBM (IBM) are also scrambling to beef up their services businesses. And the markets for both storage and servers are extremely competitive, heavily populated by both dominant players and Dell's fellow boxmakers, all seeking to reduce their exposure to the commodity PC market.

Flying Lower Dell's momentum days at an end

Make no mistake. It won't get much better for Dell. On the earnings conference call, Michael Dell himself made a point of heading off at the pass the notion that the company may be low-balling analysts. The new growth target, he said, was "not only quite strong, but relatively unprecedented for companies of our size."

The Waiting Game

Meanwhile, the company's skeptics are sitting tight now, waiting for Dell to lower long-term guidance again next year as the PC market weakens further.

"The stock's not coming back," says Fred Hickey, editor of the High-Tech Strategist newsletter, in the pages of which he's correctly predicted the current slowdown in the PC, semiconductor and cellular handset markets this year.

"You can't point to anything that's going to turn it around," he says. "We're in November now. There ain't no second-half boom. There ain't no Y2K boom. There ain't no Windows 2000 pickup. We're dealing with a saturated market and there's no savior. And it's never been clearer that that's the case." (Hickey has no position in Dell.)

On that premise, the rest of the PC sector was falling apart on Friday. Gateway (GTW) was off 12.3%, H-P was losing 7.9% and Compaq was down 7.3%.

"The funny thing is that Dell is the best of all the PC companies," Hickey says. "But it's a rancid business they're in. I think they're doing everything right."

>To order reprints of this article, click here: Reprints