Back in the 1990s, Dell (NASDAQ: DELL) could do no wrong. On the back of its the Dell stock boom and a high growth PC business, revenues soared and profits multiplied. The stock market loved Dell, and its stock price zoomed up by more than 1,000% from pre-90s levels to $51 at the turn of the millennium.
This decade has been a different story, though, for DELL stock.
Competitors caught up in sales and consumer buying habits changed. The growth of consumer technology (such as tablets) and economic recession made things worse. Finally, Dell stock bottomed out at $8.39 in March 2009. Since then, the stock has held steady in the $13 – $14 range.
That range is a pretty big comedown from the company’s earlier explosive growth. But Dell might yet deliver results.
The company is transforming itself to a services and storage company. It has ramped up service offerings and snapped up 12 companies to prepare for the cloud computing revolution. And, the results are beginning to show.
A look at the company’s latest balance sheet reveals interesting numbers for Dell (NASDAQ: DELL). Even as consumer sales, the mainstay of its business, declined by 8% on a year-to-year basis last quarter, net income doubled to $927 million. The increase was due to gains in server and storage revenue, which grew by 22% and 20%, respectively, as businesses upgraded or bought new servers.
According to Gartner Inc., revenues from cloud computing services are expected to touch $148.8 billion in 2014. Efficient, scalable and affordable equipment is required to drive these services. Of course, Dell is not as sexy as Hewlett Packard (NASDAQ: HPQ) in technology. However, it does have an efficient supply chain system that is necessary to assemble low cost, efficient products. This system was earlier used to fuel the PC revolution and is now being tweaked to produce servers.
According to figures from International Data Corporation, overall server revenues grew by 11.4% last year. Similarly, Dell’s revenues from its server division grew by 25.6%, the highest amongst all companies. Most of that growth came from small businesses: the same research firm reported that 40% of small and mid-sized businesses in the U.S. use Dell servers. Thus, while rivals IBM (NYSE: IBM) and HP slug it out for the big ticket clients, Dell has carved a niche in the small business space.
That niche should also come in handy for Dell’s expansion in emerging markets. In its quarterly earnings call in February, the company stated that BRIC countries in emerging markets (Brazil, Russia, India and China) accounted for 13%of Dell’s revenues. According to AMI-Partners, a Singapore-based research firm, the Asia-Pacific region is expected to lead worldwide expansion of cloud computing markets. Further, small businesses in the region, that includes China and India, will invest $11.4 billion on cloud computing solutions in 2011 alone. The combination of cost-conscious consumers and Dell’s cheap and scalable technology will ensure that the company gains a major portion of the market.
Dell’s acquisitions are also beginning to show results. EqualLogic has already delivered on its valuation promise of $1.4 billion by producing revenues of $800 million annual revenues last year. Similarly, data management firm Compellent (NYSE: CML), which counts the Federal Bureau of Investigation in its customers, is an excellent buy in the increasingly important data management space.
Interestingly, Dell has spent far less than its competitors on buying these companies. This, coupled with income gains, has left the company with healthy cash holdings of $15 billion to invest in further acquisitions and research.
With its scalable product mix and niche strategy, Dell might yet turn out to be the dark horse among technology stocks.
As of this writing, Rakesh Sharma did not own a position in any of the stocks named here.
