As Hewlett-Packard (NYSE:HPQ) cratered last week, Dell (Nasdaq:DELL) CEO Michael Dell went on Twitter and made some stinging comments. One tweet: “If HP spins off their PC business … maybe they will call it Compaq?” There was also this zinger: “HP … They are calling it a separation, but it feels like a divorce.”
Keep in mind that H-P’s spinoff of its PC business could easily take a year. In the meantime, Michael will certainly work hard to disrupt things and poach customers.
Is this an opportunity to pick up shares in Dell? Or is it better to hold off?
To see, here’s a look at the pros and cons:
Pros
Transformation. Over the past few years, Dell has been aggressive with its acquisitions. The strategy has been to focus on fast-growing, high-margin technology businesses, such as those in storage, cloud computing and virtualization. Some of the deals include EqualLogic, Compellent and Force10 Networks. Dell has been fairly successful in integrating the deals and finding ways to upsell its huge customer base.
Lean operation. Dell knows how to keep cutting costs. In fact, during the latest quarter, gross margins hit a hefty 23.2%.
The company has a highly sophisticated infrastructure system and a successful build-to-order business model. There are also big advantages to its massive scale.
Cash machine. During the past year, cash flows amounted to $5.2 billion. In total, Dell has $16.2 billion in the bank (this compares to a market cap of only $26 billion).
Cons
Economy. Dell has indicated that its growth rate for the year will be between 1% to 5%. Unfortunately, it is likely to be on the low end because of the problems in the U.S. and Europe. There will also be cutbacks on federal government spending on information technology, which will be a big drag on Dell.
iPad. Apple (Nasdaq:AAPL) has quickly turned into the category leader in the tablet space, and H-P has already exited the industry (within about 49 days of its featured product’s launch!)
As for Dell, its tablet strategy looks feeble, and let’s face it — the company has had a terrible track record with mobile technologies. What’s more, it looks like the iPad is starting to take away business from the traditional PC market.
PC-centric. Despite all the dealmaking, more than two-thirds of Dell’s revenue comes from the PC business. Is this a good place to be when H-P wants to dump its own operation – which will likely be at a steep discount?
Verdict
Like IBM (NYSE:IBM), Dell is trying to become a full-services IT company. While this is a smart strategy, it is hard to pull it off. After all, it took IBM nearly 20 years to do it.
In the meantime, there are few catalysts to move the needle for Dell. Instead, it looks like the company will muddle along as the economy slows down.
In light of these factors, the cons outweigh the pros on the stock for now.
Tom Taulli is the author of various books, including “All About Commodities” and “All About Short Selling.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
