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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.

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Last Post by bogeybizz
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I agree with your comments in general. Apple produces a far superior product, but many cannot afford the Mercedes so they buy the volkswagon of computers. Now comes the problem. GREED. The shareholders expectations are increasingly ridiculous in a feeding frenzy market that requires cutting and some bleeding to stay competitive. While they seek ever increasing profit margins, causing constant rethinking to stay afloat. The consumer seeks ever cheaper computers. This is a recipe for disaster. Apple on the other hand doesn't cave to either. While their pricing is higher, it has remained consistently so and doesn't cave to every whim, keeping the shareholders happy. Profit margin is driven by the need to be creative , reinventing itself with newer items that catch the markets attention. You notice this is true, they lead because almost every thing is a cheap copy take the IPOD for example. Maybe if companies stop letting everyone else(stockholders/consumers) drive their every thought and rather followed this lead of quality and innovation, like the old days, our jobs wouldn't be going overseas.

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Whilst I agree with your comments I feel that consumers, especially the Walmart crowd, are always looking for the cheapest solution resulting in HP and Dell offering 1-3 year computers. With the market in flux, jobs, gas and taxes rising I see alot of people using these solutions in the interim. I have always been a PC guy but would love to be able to afford a MAC as i know I don't get many if any calls from these users. I personally weigh alot of options myself when purchasing a PC, but I know most pc's today have all or most of the components built on the motherboard resulting in numerous problems down the road......but most consumers don't know a high grade motherboard from a cheapo and could care less, they just want a pc. So in summary I don't know about Dell and poor business practices but if they want in on the Walmart pricing structure they should in turn market that kind of PC as it doesn't seem to have affected HP's sales...

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