Dell's Poised to Shine After the Storm Passes
Updated from Aug. 2
I can understand that. But you might want to think twice before you get too negative on Dell (DELL), despite yesterday's warning that third-quarter sales may slow as much as 5% from the second quarter.
The bear case is well-rehearsed: The market for personal computers has become saturated. Organic growth is pretty much finished, and the replacement market that remains is incapable of sustaining the sort of growth that PC investors grew accustomed to in the 1990s. To cope with this secular downturn in demand, remaining manufacturers will duke it out on price until they abandon the business altogether. Until then, profit margins will suffer, even at Dell, which even the most bearish readily concede sells PCs better than any other company on the planet.The secular slowdown is real. But it's easy to overestimate its gravity for Dell. Whatever long-term PC-unit growth does, it's not going to zero. And wherever the long-term growth rate should settle, you can expect Dell to grow faster, as it has been doing throughout the current downturn. Dell gained nearly 2.5 percentage points in market share in the second quarter of 2001, unseating Compaq (CPQ) as the world's No. 1 PC maker. Unit shipments grew more than 20% in the quarter, during which every other major manufacturer lost market share.
Ouch!Dell has been able to do this, of course, by cranking the lever on price. In the short term, this strategy damages Dell's profit margins. But not nearly as much as it does to Dell's competitors, each of which labors under a significantly higher cost structure than Dell has.
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