PC Market No Longer the Place to Be
Wednesday, May 28th, 2008
By George Leong, B.Comm. for Profit Confidential
Dell, Inc. (NASDAQ/DELL), the world’s largest computer maker, used to be the toast of Wall Street, as investors bid the stock price up from $0.10 in August 1988 to nearly $60.00 in early 2000, before the technology market imploded and crushed growth stocks.
Fast-forward eight years to the point where Dell is no longer viewed as a growth stock, but is valued as a commodity stock trading at 11.70 times its estimated fiscal 2010 (ended January) EPS. Earnings growth has slowed in this low margin business. Over the next five years, earnings are expected to rise only 11.94% annually, which is clearly not growth metrics. If you are looking at Dell for above-average price appreciation potential, look elsewhere. In fact, companies like International Business Machines Corporation (NYSE/IBM) and Hewlett-Packard Company (NYSE/HPQ) have similar valuation, but they pay out dividends.
For Dell, revenue and earnings growth has slowed considerably due to intense competition and the fact that computers are now commodity stocks. Revenue growth in fiscal 2009 ending in January is predicted at a mere 5.6%, followed by 5.8% in fiscal 2010, not exactly the signs of a growth stock. The reality is that the easy profits have been made on Dell and it is time to move on if you have not already done so.
Increased competitive pressure for world market share from other key players is impacting Dell. For instance, China-based Lenovo, which acquired the “ThinkPad” business from IBM a few years ago, is currently threatening Dell’s stranglehold on the world market share.
The fact is that the computer business 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. Although, 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. Investors looking for growth should bypass PC makers and look for companies that are innovators in technology and where the product is in early stages.
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
