The world’s largest computer maker Dell Inc. (NASDAQ/DELL) delivered some bad news to investors on Tuesday regarding its growth. Dell missed its first quarter earnings guidance. The company’s Q1 sales of $14.2 billion were also at the low end of the consensus estimate of $14.2-$14.6 billion.
Increased competitive pressure in the fight for world market share from other key players including Hewlett-Packard Co. (NYSE/HPQ) and China-based Lenovo is currently threatening Dell’s stranglehold on the world market share.
The reality is the news should not have been a surprise. We have discussed this issue in the past regarding Dell and the threat of competition, especially from Lenovo, which has the use of cheap labor and resources in China. Lenovo, which purchased the laptop ThinkPad business from International Business Machines Corp. (NYSE/IBM), has made it known that it plans to expand its product line including its cheap desktops into the United States. This is something that Dell and other PC makers should be concerned about as it is fast approaching.
The reality is Dell has been drastically cutting prices on its products by much larger discounts than in the past. Obviously, Dell realizes the extent of the situation and aims to maintain its market leadership. But, the fact is the PC maker is a commodity market where margins, which used to be higher, are now squeezed. This is the trend and I do not expect it to change as competition heats up going forward.
Where in the past, the PC market may have been considered a growth area; you can no longer say that. The market is mature. Price competition for market share will only rise. The same is happening to Microsoft as it struggles to expand into more growth-oriented areas on the Internet other than its current software business. Investors looking for growth should bypass PC makers and look for companies who are innovators in technology and where the product is in early stage.