In the words of the immortal Chris Farley . . . “Holy Shnikey’s!”
That was my reaction after watching Dell’s stock tank after what pundits are billing as an “underwhelming” second quarter earnings performance.
Investors seemed to agree on Thursday, as Dell stock fell 13% to under $22 per share (off its 2008 high of $30 per share). Perhaps the most worrisome sign from Dell was its pronouncement that worldwide wide technology spending was veering downward for the rest of 2008.
I saw the Dell numbers before everything hit the fan. My takeaway was “okay . . . not bad”. After all, Dell had been beating analyst’s expectations by about $400 million per quarter. In Q1, the stock shot up after Dell announced its financial numbers and the landscape looked like a rosy one.
What seems to be bothering investors and analysts now is Dell’s profit margin picture. The company has been slashing its computer prices, in part to keep up with the lower cost models rolling out of HP and IBM. Dell has been releasing its computers to Wal-Mart and Best Buy knowing full well that the retailers would cut the cost of its computers significantly. Consequently, Dell’s gross profit margin decreased from 20% to 17.2% from Q1 to Q2. Net income dropped as well – to $616 million in Q2.
Analysts were quick to pounce. JP Morgan analyst Mark Moskowitz labeled the margin drop "a stunner”. BMO Capital Markets analyst Keith Bachman labeled Dell's second quarter " a big step back."
Dell founder and CEO Michael Dell evidently realizes he’s made a mistake. In a conference call with analysts on Thursday he admitted that Dell has been “overzealous” in slashing prices not just in the U.S., but also in Europe, Africa, and the Middle East.
Too little, too late, it seems. Friedman Billings Ramsey analyst Clay Sumner predicted it will be several quarters until Dell compensates for the deferral of revenue on some European maintenance contracts and he thinks the company's "aggressive pricing" may again offset favorable component costs, especially in notebook computers.
Hey, I’m an Apple guy, and there’s a good reason why Apple has doubled its market share in personal computers in the past two years – it makes a product people really want (call it “destination” computing). Dell, who is overly reliant on Microsoft’s Jurassic-era technology, has got caught in Apple’s wake, to some degree. That, and the fact that it has slashed prices by too much, are the reasons why Dell is in dire straights this week.
