Dell Shares Docked

Investors get impatient with the PC maker's turnaround progress.
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Updated for 12:06 p.m. EST

SAN FRANCISCO -- Fixing a company is not meant to be easy.

And as

Dell

(DELL) - Get Report

learned late Thursday, appeasing investors during such an overhaul can be even tougher.

Despite showing important signs of progress in various parts of its business, the PC maker's stock got whacked as investors registered their displeasure with Dell's rising costs and the pace of its rehabilitation.

Shares of Dell continued to sink Friday, finishing down $3.60, or 12.8%, to $24.54 to close at its lowest level in nearly 8 months.

The Street's reaction to Dell's third-quarter earnings report was epitomized by Goldman Sachs, which ejected Dell from its "conviction buy" list of preferred companies and replaced it with

Hewlett-Packard

(HPQ) - Get Report

-- just one month after adding Dell to the list.

"Although our thesis on Dell as a turnaround is intact, the timeline is not and the uncertainty is higher," wrote Goldman Sachs analyst Laura Conigliaro in a note to investors.

The improvement in Dell's operating margin -- which reached 5.3% in the third quarter vs. 5.1% at this time a year ago -- is "smaller and more gradual than we had been expecting," wrote Conigliaro, who maintained her buy rating on Dell despite evicting it from the VIP list and cutting her price target from $35 to $32.

Goldman Sachs makes a market in Dell shares and has received compensation for investment-banking and non-investment-banking services from Dell in the past 12 months.

After Dell's post-earnings conference call Thursday and management's wishy-washy signals about cost-cutting, even Dell bulls were forced to acknowledge that operating expense reductions may not occur as swiftly as some had hoped.

And Dell's push into markets such as consumer retail and emerging economies means an increasing portion of Dell's business going forward will sport lower profit margins than the company has so far enjoyed.

The question now is whether Dell is building up enough potential spring in its top line to offset all of those negative factors.

Dell's third-quarter revenue beat was encouraging. The company boosted sales 8.5% year-over-year to $15.6 billion -- its fastest growth rate since the fourth quarter of 2005.

The company flailed in the U.S. consumer segment, with revenue down 6%. But the news was better everywhere else. Total notebook unit shipments increased 25%. Sales in India were up 47%, and increased 22% in China.

Dell's sluggish PC sales in the U.S. weighed heavily on shares of disk drive maker

Seagate Technology

(STX) - Get Report

, which gets about 9% of its revenue from Dell. Seagate shares closed Friday off $1.33, nearly 5% to $25.77.

CEO Michael Dell said the company intends to sharply increase its activities in China, striking retail distribution deals and partnership to boost its presence in Chinese cities.

Dell also is aggressively moving to fire up growth in its services business, through a string of recent acquisitions.

Dell executives were not very forthcoming about what kind of revenue growth the company is aiming for, noting only that the company's model called for it to grow "faster than the industry."

Give recent missteps such as Dell's inability to produce its colorful new notebooks in volume, as well as the company's lack of experience integrating acquisitions, there's plenty of reason to be cautious about the company's ability to actually deliver the growth.

Wall Street currently expects Dell's revenue growth rate next year to be roughly the same as the meager 5.7% expected this year, according to analysts' expectations.

Still, with Michael Dell once again at the helm, some investors are confident.

"Dell is an undervalued company run by a very good manager that's got a very good model. They will get it together," says Mark Coffelt, chief investment officer of Empiric Advisors, which owns Dell shares.

Friday's selloff was more of an overreaction to unrealistic expectations than an indication of the company's prospects, he believes.

"Right now, the market just has very little tolerance for any company that doesn't robustly beat earnings," says Coffelt. "I think Michael Dell was focusing on the business, and people expected him to focus on managing expectations."