Few on Wall Street would be even mildly surprised if

Dell

(DELL) - Get Report

were to warn of an earnings shortfall in the near future. But investors who've been piling into the stock as if it's a bargain could be setting themselves up for a shock.

For weeks now, and without any guidance from the company, analysts have been steadily ratcheting down their fiscal 2002 estimates for Dell. It's quite a change from the way things worked last fall, when nearly every analyst on Wall Street was caught flatfooted as the PC sector fell apart. The

Securities and Exchange Commission's

Regulation FD, which has severely restricted the amount of information companies can convey to the analysts that cover them, has forced the

sell side to work much harder to get out in front of fundamental trends. And right now, the trend is clearly down.

Downers

In the past couple of weeks, a number of analysts have started to take aggressively negative stances on Dell's full-year earnings estimates. Take

Lehman Brothers'

Dan Niles. Last week, he cut Dell's estimate for fiscal 2002 earnings to $1 a share from $1.10. (Dell is set to report fiscal 2001's fourth-quarter results next month.) Andy Neff of

Bear Stearns

soon followed by going even lower, cutting his 2002 profit forecast to a mere 90 cents a share.

Friday, reacting to Thursday's bad news from

Gateway

(GTW)

and

Hewlett-Packard

(HWP)

,

Robertson Stephens

analyst Eric Rothdeutsch and David Bailey of

Gerard Klauer Mattison

both lowered the boom, slashing their forecasts to 93 cents and $1, respectively.

Everyone's citing the same concern: a full-fledged price war among PC manufacturers trying to unload inventory and vying to gain market share. For PC investors, the worst news to come out of Gateway's earnings conference call Thursday night was CFO John Todd's frank avowal of his company's readiness to slug it out on price. And you can be sure that Dell won't shrink from the conflict.

Smoke on the Water

"Dell smells blood in the water," says Rothdeutsch, whose firm hasn't performed underwriting for Dell. "It sees the inventory out there from H-P and

Compaq

(CPQ)

, and it's taking every opportunity to take market share." Rothdeutsch points to Dell's track record of gaining market share whenever selling prices decline dramatically. "They've clearly been a price leader," he says. "And with Gateway firing a shot across Dell's bow saying they're going to match them, it's going to be an ugly environment for the foreseeable future."

What's the big deal? None of this is new news, right?

Remember that at its November analyst meeting, Dell told attendees to expect revenue growth of 20% in 2002, with "slightly faster" earnings growth. Imagine if Dell were to lower its 2002 guidance to something near the number Neff is expecting. Assuming the company earns the 25 cents that analysts expect in the fourth quarter, by no means a sure thing in an environment this dicey, Dell would be lowering its earnings forecast from 20%-plus growth to close to no growth.

That would translate into a revenue miss of something around $500 million -- a pretty big deal. But, oddly, investors don't seem bothered by the prospect of a looming warning from Dell, whose stock has gained a whopping 26% since Lehman's Niles put out his note on Jan. 3.

"I just think the bearishness has gotten so overdone," said Jeff Matthews, president of the Connecticut-based hedge fund

Ram Partners

, midway through Friday's session. "At some point you say to yourself, 'This is stupid.' " Accordingly, Matthews said he was long Dell

calls, though that position could change at any moment. (Soon after, after Dell briefly rallied, Matthews called back to say he no longer owned those calls.)

Maybe the market has already priced in the worst news. But with the rest of the PC sector falling apart, bottom-fishing investors should understand the risks of that assumption. A lot of bad news had been priced into Gateway before it lowered its full-year guidance Thursday. Having already fallen 65% from its September high, the stock lost another 9.4% on Friday.