Google Inc. (NASDSAQ/GOOG) inspired us this week with strong operating results and guidance. The stock traded as high as $383.90 on Tuesday, edging up over $8 a share even when the overall market was reacting negatively to a 25-basis point increase in the Fed Funds rate to 4%. But the inspiration that Google showed was clearly not an indication of strength in the tech sector, but rather isolated strong results by the new powerhouse in the Internet sector.
All eyes nervously focused on Dell Inc. (NASDAQ/DELL), as the world’s number one PC maker spooked us on Halloween after it lowered its third quarter sales outlook and suggested earnings would come in at the low end of its previous forecast. The news was not what investors wanted to hear, as anything less than stellar in this market will drive a stock lower.
Dell attributed the slower growth to sluggish growth in the United States and the United Kingdom, along with a $300-million charge to fix a faulty computer part. Dell is an awesome American success story, but I was not surprised by the warning as PC sales have been lackluster. That is the major reason why International Business Machines Corp. (NYSE.IBM) dumped its PC division to Chinese PC maker Lenovo Group LTD ADR (LNVGY.PK) and the reason why PC maker Gateway Inc. (NYSE/GTW) is currently trading as a penny stock.
Just go and check out the prices of PCs and notebooks. For the consumer, the prices have been sliding, as PC makers fight for every inch of market share via aggressive price cuts. Dell admitted that its aggressive price cuts were partly to blame for its results, but you can’t fault Dell entirely for this strategy since every other PC maker is also significantly dropping their prices and offering attractive rebates. I recently purchased a new Sony PC that cost me less than $900. The same computer last year would have cost me $1200. If you are a PC maker, you cannot ignore the price wars.
And with the holiday shopping season coming around the corner, PC makers will be even more anxious to reduce inventory, and that cannot be good for Dell and its peers. It’s a sector where you want to avoid until we see the pricing firm up. I used to own both Dell and Gateway, but that was years ago. Today, I would be as hesitant to add them to a buy and hold portfolio as I would trade them.