The Dell Promise

By Duru

August 12, 2004


Almost a month ago, I wrote about Intel as a warning confirming that the bear market is back, especially in tech. Since then, the Nasdaq has continued its slide with no pre-election rally anywhere in sight. Intel itself is down about a point from that time. Instead of even a two or three-day rally, we have witnessed some pretty awful post-earnings blow-ups that continue to discourage the bulls.

Well, tonight, we FINALLY got some true good news from a big-cap, hardware-oriented company. Right on the heels of bad news from HP and Cisco, here comes Dell trying to ride to the tech rescue. I will not rehash all the earnings news here. I just want to note that Dell is claiming all looks fine from their perch, and they plan to power ahead as planned. They are offering up some desperately needed hope to the bulls that the robust economic recovery is not in danger of falling apart. I highly recommend that you pull up a chair and read some earnings report for yourself, but I will post here what I think is one of the more important quotes from CEO Kevin Rollins:

"The markets should not value every company, every technology, the whole sector the same way all the time. To paint the entire industry with one brush would be ill-advised for investors." ("Shakeout Hits Tech Sector Amid a Tepid Recovery" The Wall Street Journal, 8/12/04)

This is one light of hope for tech believers. It suggests that we are not headed for an overall tech recession (and recession for the overall economy). It suggests that it is safe for you to go out amongst the garbage heap and find some gems that have been thrown out with the grime and dust of tech's troubled home. (In fact, to help drive the point home, IBM separately announced an aggressive hiring plan - they have raised their original plans for 15,000 new jobs worldwide to 18,800. This means a lot in a tech economy where big bad Cisco just noted that they have added all of 64 net new jobs in the past few years! {see comments from CEO John Chambers during Cisco's latest earnings conference call})

I often think of Dell as the Wal-mart and McDonald's of tech. They take cheap, standard components, bare bones cost structures, efficient operations, add a little marketing, and, voila, profits! The chart below shows how consistently this model has performed for Dell over the past 10 years in terms of profit margins.

Of course, you will also note that people are willing to pay a LOT more today's performance that they were to pay for similar performance in the mid-90s. This is the same situation as we saw with Intel (and discussed more fully there). But unlike Intel, Dell is arguably a grand survivor of the bubble. The long-term, 9-day chart below demonstrates just how well Dell is standing tall.

The main thing to note is that Dell bottomed well before the Nasdaq bottomed after the bubble popped. In fact, Dell first hit its post-bubble lows just as most folks were finally admitting that something was amiss in the economy. Another move to the bottom after 9/11, and Dell has not looked back since. You can see that slowly but surely, Dell has scratched out a small, but decent, return from that point. Compared to most technology stocks, Dell has been pretty stable, reliable, and amazingly resilient. Indeed, investors have not valued Dell the same way as they have most other tech stocks. Dell has even outperformed the Nasdaq over this time. Even for 2004 where the Nazz has crumbled for a loss over 10%, Dell has only lost 2% or so.

So, overall, Dell represents the hope and the promise of the tech sector. Its out-performance means that it is not generally an indicator of the health of the tech sector. But this very out-performance of a big, hardware company that makes products that can appear in all facets of "techie" life does indicate that all hope need not be lost for those who still want to believe! While Intel's performance serves as a warning for the tech sector in general, Dell's performance serves as a promise that its competitors are in for more trouble…

Please note that this piece is not a recommendation to buy or sell Dell. It has been written only to show another side of the technology stock universe. As always, I do recommend that you be careful out there!


Ó DrDuru, 2004