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Dell up Doody Creek Without a Paddle

Sagging sales in a flagging market spell long-term troubles


Sitting here cranking out some stories on my Dell (NASDAQ:DELL) computer (circa 2003) gets me to wondering how much longer the screen will display, or how long the keys will hold out, or whether the CPU will keep all the data flowing.

Of course, if you’re like me, you have a trusty iPad sitting next to you at all times.

If you’re Dell, we are part of a really big problem.

Last night’s release of dismal earnings and a warning to both the analyst community and those still holding Dell stock tells a woeful tale: From individuals to corporations, many people aren’t buying computers — and Dell computers in particular — anymore, nor will they in the near future.

DELL shares were rocked by 17% Wednesday on news of a 4% drop in revenues and 33% cratering of profits in the first quarter. Dell’s adjusted earnings of 43 cents per share were lower than the 46-cent estimates, and the stock dropped 11% in after-hours trading. Earnings would’ve been even worse on a per share basis if not for a slew of buybacks that reduced shares by 8% at a cost of nearly $2 billion.

Worse, the company acknowledged that the fiscal second quarter — and perhaps a few quarters after that — will be weak, setting the stage for Wednesday’s drop. The stock was set to finish around $12.50, its lowest point since last September.

What is going on here? Several disquieting trends:

  • Dell likes to focus on margins, and cost-cutting to counter competitors like IBM (NYSE:IBM), Lenovo (PINK:LNVGY), Hewlett-Packard (NYSE:HPQ) and Acer is anathema to Dell. Dell’s 5.6% profit margin might not look like much, but in a pure commodity business, anything north of about 3% is pretty good. But at some point, revenue growth must improve, particularly at a time when HPQ is weak and tries to sort out its own problems.
  • Corporate and personal computer sales are either slowing or are flat. Consumer sales of notebooks fell 15% in the first quarter of the year, and companies are either holding off as long as possible to upgrade aging systems, or encouraging — in some cases with stipends — a BYOC system (bring your own computer). Remember Cisco (NASDAQ:CSCO)? Just a couple weeks ago it told a similar tale of woe.
  • Dell is trying to transition to serving the enterprise market, and its consumer business is pressured from Apple‘s (NASDAQ:AAPL) iPad and other tablet makers.
  • Dell’s cash flow from operations swung from a source of cash to a use of cash, with the company losing $138 million in cash from operations during the period. First-quarter free cash flow was a -$280 million, compared to a positive $328 million from the same period a year ago.

Analysts for Dell have taken the messages to heart, lowering revenue, profit and, of course, stock price targets. The end of the fall might not be totally out of sight.

Founder Michael Dell needs to find a way to protect his 243 million-share ($2.9 billion) baby that he famously founded in his University of Texas dorm room. But the company plan still is primarily based on a model that is hard to sustain for the long term, particularly in an industry that famously is both innovative and fickle: offer the lowest price while producing at the lowest cost available.

Innovation is no longer about wringing costs out of the terminal and screen on my desk. It’s about innovations in changing markets, and Dell simply has not been at the forefront, or even midpoint, of that type of change.

Maybe Dell can wave a flag at its Palo Alto competitors and see if they want to spend their money on a troubled company with a large installed base and deep customer Rolodex.

If not, I need to upgrade quickly: There might not be a next-generation Dell.

Marc Bastow is an Assistant Editor at As of this writing, he was long AAPL.

Article printed from InvestorPlace Media,

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