I have written over the past few months that Dell Inc. (NASDAQ: DELL) is dead money at least for this year, and possibly next. The company has structural issues to address before sustainable growth is viable again. The question remains, what has been holding the stock up? For one, the stock market rally. Also, a raft of analysts "seeing a potential turn around." Potential is one thing, probable is another.
Dell built itself into a huge, global player through a direct sales model, eliminating the middleman and the attendant costs associated with the middleman. Dell soared as it embraced both the enterprise and the consumer segments. Dell began to fall victim to lousy service and follow through. Its call-centers jokingly became known as Dell's hell-centers. If the model is direct, the corresponding service must be excellent or customers are vulnerable to other vendors. So, with Apple Inc.'s (NASDAQ: AAPL) mega-success with the retail store model and Hewlett-Packard's (NYSE: HPQ) and Gateway's (NYSE: GTW) strong positioning within major retailers like Best Buy, what can Dell do to forge a presence? Is Radio Shack the answer?
Radio Shack has been a decent turn around story as management has carved out its excess costs and begun to realize some leverage to its earning base. If Dell were to acquire Radio Shack (NYSE: RSH), it would be an instant 4,000 stores for distribution. But it is not as easy as it sounds.
Apple has established its store base, 177 strong, from scratch, therefore establishing the Apple culture from the get-go. Dell has a culture based strictly in Austin, Texas and has yet to be tested outside its friendly confines. Apple has a firm grasp on the consumers tastes and has thus built a strong and loyal base.
Dell is facing a corporate crisis that happens occasionally to growth companies as they hit certain levels and milestones. With Michael Dell resuming the top job, the question is what strategy can help Dell get over the hump? The issues are daunting and include shrinking margins, consumer fickleness and HPQ kicking them every day. So why own or buy the stock?
I would not buy Dell, and if I owned it I would look elsewhere for growth and returns. This company has been derailed and will probably not come back for another year or two.
Georges Yared is the CIO of Yared Investment Research where he explores more growth stock ideas.
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Reader Comments (Page 1 of 1)
5-08-2007 @ 12:55PM
GUMBO said...
Dell is dead not because of its mismanagement or wahtever. It is because of me!!! I was really pissed off with Dell's refusal to use AMD chips. I decided to backup my truck and load up Dell shares alot. (I cant tell you how many) Dell plummeted right after that. (Yes, I lost money but I cant tell you how much) I am happy now that Dell crashed!!! Dell learned a hard lesson. I lost less than what Michael Dell lost. I dont care!! Dell know better than that. If you cant make sense of what I am trying to say, I dont blame you. That is how it happened. Dell is a great company, but I destroyed it !! I cant accept corporate misconduct like refusing to use AMD chips just to save a penny. It is unexcusable!! I punched Dell in the face. It is down. I also punched Kirk in the face and he got out of General Motors without any profits. I am very good at punching at faces!!
5-08-2007 @ 12:59PM
James said...
I've been waiting for Dell to crash for a while. I am far from a stock prognosticator but I know that Dell's customer service is beyond a joke. I, like many others, fell prey to Dell's marketing and bought a Dell laptop a little over a year ago. I then had a problem with the laptop about a month after delivery and fell into the "Dell Hell" trying to get some outsourced customer service rep in India to help me. In fairness to these folks, I'm sure they're trying to do their best but (a) there is a clear language issue (especially if you try their online customer service); and (b) there is absolutely zero accountability. Any complaints or requests to speak with a supervisor fall on deaf ears.
The irony is that once I sent my laptop in for repairs the turnaround in getting it back to me was remarkable and I have had no problems with it since. In fact, I'm typing this post on it right now.
All that being said, I will NEVER buy another Dell computer. To me, it is worth it to spend an extra couple of hundred dollars to get responsive customer service than to get a less-expensive Dell and have to go through "Dell Hell" again. If you amortize that amount over the typical useful life of a computer (two to three years), it's more than worth it.
7-04-2007 @ 1:07PM
brettze said...
HPQ is very vulnerable now because of ink cartridges. HPQ is finding itself fighting off copycat ink cartridges that sells for much less. HPQ relies on ink cartridges for 75% or so of profits. HPQ is starting selling ink cartridges with less ink for less price but costs more per page. the copy cat ink cartridges will take over the ink market eventually. HPQ will be forced to boost printer prices to make up for less profits on its cartridges. Ink cartridges is what keeps HPQ fending off Dell onslaught on computer sales. HPQ is climbing up stubbornly as if to defying the truth. HPQ will stumble badly shortly.