The PC Market Isn’t Where You Want Your Money These Days

The world’s largest computer maker, Dell Inc. (NASDAQ/DELL) is down 23.21% from its 52-week high of $30.80 reached nearly a year ago on March 23, 2006. The bellwether PC stock has been facing pressure on its margins as competition erodes selling prices in what is a mature market for computers. The Street is projecting mere sales growth of 3.6% in fiscal 2008 (ending January 2008). This kind of growth is not what we want to see in growth stocks, and Dell has lost its luster.

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 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.

The reality is that 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 in 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.

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Whereas in the past, the PC market might have been considered a growth area, this is certainly not the case today. 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 side, instead of its current software business. Investors looking for growth should bypass PC makers and look for companies who are innovators in technology, with products in their early stages.

George Leong’s Take on Yesterday’s Meltdown — It was black Tuesday on the market yesterday, as a massive 9% selloff in Chinese markets drove intense selling in the U.S., where the blue- chip DOW was down more than 550 points around 3:00 p.m., before rebounding in the last hour of trading. We also saw the NASDAQ and the Russell 2000 lose close to 4% yesterday. I was not surprised to see the selloff, as the current uptrend, in place since mid-July 2006, has yet to see a correction. As readers of my weekly technical commentary realize, I have been pointing to some topping action in both the NASDAQ and DOW.

The reality is that the markets were extremely overbought and therefore vulnerable to any major negative market shock such as the one we witnessed in China. The Relative Strength of the various market benchmarks was also not that supportive of the buying.

My analysis of the CBOE NASDAQ Volatility Index (VXN) — a barometer of near-term market volatility based on NASDAQ 100 index option prices — also revealed a potential near-term top based on data of February 21, 2007 as readers of my weekly technical commentary would know. Readings for the CBOE S&P 500 Volatility Index (VIX) also pointed to a near-term top.

In my view, the correction was necessary, but whether it is now over is unknown. In upcoming sessions, watch to see if stocks rebound or trend lower. I expect volatile trading as the bulls and bears battle it out.