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Dell's price cuts take their toll
Attempting to boost revenues, Dell cut PC prices. Now it's the company's stock that is getting even cheaper.
By Robert Walberg
When it issued a profit warning after Mondays close, Dell completed a PC trilogy.
Citing aggressive pricing conditions, Dell (DELL, news, msgs) joined software giant Microsoft (MSFT, news, msgs) and chip-maker Intel (INTC, news, msgs) in guiding investor expectations lower. The worlds largest computer company now expects to generate earnings per share of 33 cents this quarter, versus prior guidance of 36-38 cents.
Investors were not pleased, and Dell shares fell nearly 6% in after-hours stock trading.
What was interesting about Dell's profit warning was that the company tried to cushion the blow a bit by suggesting that its current price-cutting strategy is aimed at reinvigorating long-term revenue growth. But the strategy didnt work to bolster top-line growth during the current quarter -- at least relative to Wall Street's expectations -- as Dells revenue projection for the current quarter, $14.2 billion, is below the consensus estimate of $14.54 billion.
PC problems
Even if Dells discounted prices help bolster sales, the question for investors is this: Will the top line grow fast enough to offset the downward pressure on margins and profits? Its a dangerous game Dells management is playing and one that hasnt seemed to work very well. After years of beating Wall Street expectations, profit warnings from Dell are now becoming commonplace.
Investors also might want to shy away from a company that focuses primarily on discounted prices to drive sales. It hasnt done much for General Motors (GM, news, msgs) or The Gap Inc. (GPS, news, msgs) over the last decade, and I doubt it will revitalize Dell.
More from MSN Money
Dell, like GM, needs to fully understand what ails it before management can actually go about fixing the problem. For Dell, management believes that sales can recover if it recaptures the price advantages it once enjoyed over competitors. But, based on conversations Ive had with many people since beginning to write about Dell for MSN Money a year-ago, I think the real problems are product quality and customer service.
The perception is that Dell computers routinely have bugs and that the companys tech support is maddeningly slow and increasingly uncooperative and unhelpful.
These are some of the key issues driving consumers and businesses to consider alternative brands. Until management recognizes that it has a problem in these areas -- and works to fix them -- efforts to rebuild sales on the back of price cuts wont work. It should also be noted that Dells prices are already relatively low, so it isnt clear that simply cutting prices further will do much to jumpstart demand.
Not cheap enough
PC demand, especially desktops, might simply be slowing as consumers opt increasingly for portability, be it with laptops or wireless phone devices. Theres also the problem of more determined competition competition that might not be willing to cede share to Dell on prices. A price war wont be good for anybody tied to the industry.
As an investment, Dells shares remain a poor choice. The company has shown little earnings consistency over the last twelve months and it is struggling to gain share in an increasingly competitive and price-sensitive market. Dont be fooled into thinking that just because the stock is at a multi-year low that it is a buy.
The stock, down 5.8% in after hours trading, is likely to fall another 15% or so to the $20-$21 range.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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Fund data provided by Morningstar, Inc. © 2008. All rights reserved.Quotes supplied by Interactive DataMSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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