Shares of Dell
Yeah, you heard me. This is nothing but a slight pause in Dell's recent climb -- a buy-in opportunity whose likes you might not see for years to come. I can feel a CAPScall coming on.
Marching to a new beat
Dell used to be the king of PC sales. But the company lost its iron grip on that high-volume but skimpy-margin market to Hewlett-Packard
I think that was a brilliant idea, and I face-palmed hard when Meg Whitman chained herself to the PC industry again. Dell seems to agree and is slowly strolling down that avenue right now.
This holiday-boosted quarter, $3.2 billion of consumer sales boiled down to just $39 million of operating profit. You're looking at a 1.2% operating margin for that division. None of the other three business units held on to less than 8% of revenue.
Management's stated goal is to "prioritize operating income and cash flow." It's not a race to the bottom of the margin barrel just to collect massive revenue anymore. Let HP fight that battle with Lenovo and Acer if it wants to; Dell is done.
But what about the terrible guidance?
You might also see some headlines screaming that the near-term sales guidance was terrible. Well, a 7% sequential decline may sound bad, but then you're coming off the holiday quarter. I hear that full-blown computer systems aren't terribly popular as Valentine's Day gifts or Easter egg stuffers this year. Moreover, last quarter contained an extra week thanks to this irregular 52.2-week Gregorian calendar we're stuck with. So fourth-quarter sales saw an artificial calendar boost of about 3%, and what goes up must come down on the other side.
Once more, with feeling: Dell guides to absolutely normal seasonal revenue patterns here. What's so disappointing about that?
And even if that single-quarter view does bother you, CFO Brian Gladden painted a full-year earnings target at more than $2.13 per share. That's at least 4% above Wall Street's projections for the fiscal year. Shouldn't long-term targets count for more than the myopic near-term goals?
The secret sauce
So how is Dell supposed to pull off that miraculous earnings performance without boosting sales? The answer is big and blue.
Like about half of Silicon Valley, Dell is assembling a facsimile of the IBM
In 1993, IBM was a struggling PC maker with a $20 billion market cap. Six years later, a strategy shift into the current enterprise computing buffet had produced a 1,300% shareholder return. It's no wonder that Dell, Cisco Systems
When done correctly, this strategy creates a Keiretsu of computing tools where every sale opens up avenues to follow-up deals. Need a server? OK, and our consulting services can help you manage it, too. And hey, that data-warehousing storage unit would look great next to our data-management software!
All of these products and services are more profitable than a consumer PC or even corporate workstation could be. And need I remind you that IBM sold its PC division to Lenovo? Getting out of that business would follow the business template Dell chose very faithfully indeed. It's like removing a 5-ton anchor from your ankle.
There's no free lunch on Wall Street, but short-term haircuts in the face of a properly executed long-term plan often mark buying windows. I just opened up a bullish CAPScall on Dell to take advantage of Mr. Market's big mistake. Yes, I am willing to stake my all-star CAPS rating and, hence, my professional reputation on saying that Dell will pull this transformation off. Don't you wish all analysts held themselves accountable like that?