Microsoft Is Up, Dell Is Down and IBM Pulls Its Aptivas

Interesting -- and in some ways, apparently conflicting -- data from the PC hardware and software worlds Tuesday. And maybe, just maybe, a hidden value play.

• Item: IBM (IBM Quote) said it's pulling its Aptiva-brand PCs from retail distribution after the Christmas season and will be selling them only from its Web site. (Hey, what a concept -- selling PCs over the Web!)

• Item: Microsoft (MSFT Quote) beat the First Call/Thomson Financial earnings consensus number of 34 cents a share for its first-quarter 2000 results, reported Tuesday. Yawn.

  Microsoft, IBM and Dell: Join the Discussion onTSC Message Boards. But the really interesting part was Microsoft CFO Greg Maffei's comment: "During the quarter, we saw excellent PC unit growth, particularly in Asia. And we expect that trend to continue in the December quarter." In other words, Microsoft sees PC sales increasing during this last calendar quarter before Y2K, contrary to many analysts' predictions.

• Item: Dell's (DELL Quote) shares fell Tuesday, following CFO Tom Meredith's guidance Monday that the company's earnings in its next quarter will come in about 3 cents lower than earlier forecasts, due to fallout from the Taiwan earthquakes. After denying any impact, Dell now acknowledges that its memory costs per machine have increased by about $75 for as much as a third of its line. (To hold down the selling price, it's cutting the amount of memory installed in its machines by as much as half. Bad decision, Michael.) So, in a virtually even Nasdaq close Tuesday, Dell got knocked down about 3 bucks.

Let's count up. Bad news for IBM: It recognizes, finally, that it can't make money selling desktops at retail. Great news for Microsoft: Been there, done that, about to do some more of it. And Dell -- on a day when Big Brother says it thinks PC unit volume will be up and when IBM retreats from what has been its primary distribution channel for its consumer desktop PCs, both of which should be big pluses for Dell -- it closes down at 38 1/2.

Huh?

This isn't a lock-in, but it seems to me that if Microsoft's generally accurate upcoming-quarter unit-sales forecast is high, which benefits Dell even without other influences (because Dell ships so many boxes), and if IBM stumbles with its Aptivas, this is a pretty nice moment for Dell.

Dell may right now be in a kind of value bubble not unlike the hidden spreads which sometimes turn arbs on. I think the market overlooked these bits and has been generally undervaluing Dell for some time.

I expect a bang-up Christmas quarter for the guys from Texas. Compaq (CPQ Quote) still doesn't have its act together. The e-machine phenomenon at retail has faded. Yes, Gateway (GTW Quote) has a nice new all-in-one PC, the Astro, at a great price: $799. But overall, Dell is going to sell a lot of boxes into this Christmas market.

At 38 1/2, a flat price after a disappointing year -- up about 35%, split-adjusted from its closings in the high 20s in mid-October last year -- Dell looks good. There's not much downside risk left in the stock and considerable upside over the next few quarters.

Since I've gone that far -- remember, you don't have to go there with me -- here are a few more speculations on Dell's real value:

First, since IBM has taken the first logical step by pulling the Aptivas -- very nice consumer PCs, by the way, if overpriced and never decently promoted -- from retail channels, why not take the next logical step and start farming out Aptiva production? If so, who better than Dell as a contract shop?

IBM has never been a low-cost producer. I remember walking IBM production lines back in the early 1980s, marveling at the waste in IBM's then-vaunted Displaywriter production systems. From what I hear, not much has changed.

Would Dell risk sullying its rep by taking on -- do I hear purists sniffing? -- contract manufacturing? I don't know, and I haven't asked Michael Dell. He'd just smile if I did.

But it's an interesting speculation. What do you think picking up that incremental business -- and a little of the IBM halo -- would do for Dell's stock in the first quarter of 2000, the soonest this deal could be announced?

Now that I'm speculating, let me go out on a much longer limb: Would Dell be a smart acquisition for IBM? You bet.

If Dell stays around today's stock price, with a market cap around $100 billion, it's going to start looking good to potential acquirers. It's too expensive for most and wouldn't make much sense for them anyway. But for IBM, which could easily afford to pay, say, a 25% premium over market for the company, Dell could provide a strong base in both consumer and business PCs -- in a business model Dell has shown works in those markets -- and also beef up IBM's server business.

Lotus time again, Lou? But this time, with nice margins?

I know this is awfully speculative. A long, long shot. But an interesting speculation, no?

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I love the little jokes the market gives us, and Tuesday produced a gem: Martha Stewart Living Omnimedia (MSO Quote) and World Wrestling Federation (WWFE Quote) going out the IPO door on the same day. Both were up nicely, too.

Alan Greenspan probably wouldn't agree, but you can bet Martha thinks that's a good thing.