It's easy to look good when you're standing next to somebody ugly. And when Dell stands next to some of its competitors, I have to admit that it looks pretty good. However, that doesn't make it beautiful, just better looking than the rest.
Rick points out that Dell has been gaining market share while others have been losing it. Some of Dell's competitors such as IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HWP) have been more than happy to give it up. They don't want it anymore because they know that the margins are lousy. With other business lines to pursue, they want to be where the profits are, and they're smart enough to know that there are very scant profits to be made in the boxmaking business.
Unfortunately for Dell, almost all of its revenue comes from boxmaking and it has only begun to dip its toe into other services. Its competitors can rely on other businesses to pick up the slack in the PC market, but Dell doesn't have that luxury.
While it's impressive that Dell has managed to increase the number of units that it ships each quarter, it means little to an investor if that's not translating to more profits. I know some dot-coms that have managed to increase users and page hits every quarter too. You interested? You shouldn't be without asking to look at the bottom line first.
The plain truth is that in spite of increasing shipments, Dell's bottom line is deteriorating. Welcome to the world of mass-market manufactured goods, Rick. More units shipped, lower gross margins, lower overall profits. That's the path that most goods take on their way to commodity status. I hate to break it to you, Rick, but this isn't a trend that's solely induced by the slowing economy. The slump is exacerbating the problem of declining margins, but it's not causing it.
Dell does have a low-cost model that has helped it succeed. And although it can more quickly adjust to fluctuations in supply and demand, Dell still couldn't avoid a $742 million charge due in part to layoffs and factory closings. While their business model may be good, it's not perfect.
Dell may have capitalized on direct sales when it was still a novelty, but its competitors are quick to imitate it. The new operating efficiencies made possible by the Internet are no secret to its competitors. Michael Dell may be flattered by his imitators, but Dell shareholders will be insulted by the lower margins.
Dell may look good standing next to even uglier competitors, but you don't have to dance with any of them if you don't want to. Have a seat and be patient, there'll be better investments that will come along.
Mike "Rimpy" Renshaw is a frequent contributor to Dueling Fools -- always as a bear, which is just how he likes it. He has proudly predicted the last eight out of three tech-stock crashes. Although he doesn't have any position in Dell at the time of this publication, he has sold it short in the past and may again in the future.
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