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1 Big Reason Why Icahn, Others Might Be Overpaying for Dell

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Carl Icahn can't seem to stay out of the headlines. The one-time Netflix agitator and mortal enemy of fund manager Bill Ackman is now knee-deep in what has become a low-grade bidding war for Dell (UNKNOWN: DELL.DL  ) .

I'm mystified, though, as to why Icahn or anyone else would want a piece of the PC maker. Dell is missing out on the greatest growth opportunity we've seen in more than a decade.

Tablet troubles
Some won't agree with that take, especially those who say that tablets are, in effect, PCs. They're the just the new "form factor" -- what the computer has morphed to be, these cheerleaders say, arguing that an uptick in tablet sales favors Microsoft (NASDAQ: MSFT  ) and Intel (NASDAQ: INTC  ) at least as much as Apple and Google (NASDAQ: GOOGL  ) .


If the categories really were so indistinct, then Dell would have no reason to sell itself to the highest bidder. Just sit back and roll in the giant piles of cash built from sales of the XPS 10 tablet and the relatively new XPS 12 convertible, which earns good reviews from the likes of CNET and Engadget. These are the sorts of Windows 8 devices that will  boost the whole PC sector, right?

Source: CNET.

PC fumbles
Wrong. Manufacturers haven't seen a boost of any kind. Intel's first-quarter guidance came in below consensus due to weak PC demand. Microsoft reported good Q4 results in its Windows division, but on a comparative basis, Windows 8's launch quarter brought in about $1 billion less than Windows 7 did at the time of its introduction. Taiwanese manufacturer Acer recently said Chromebook sales are on the rise while characterizing Windows 8 as "still not successful."

Dell, too, is showing battle scars. The one-time PC king suffered an 11% decline in revenue and a 22% drop in adjusted earnings per share in Q4. Both figures nudged ahead of estimates, revealing just how pessimistic Wall Street's view is of this business.

Analysts have good reason to be wary. Q4's results continue a downward pattern that's been in place for years and that shows no signs of abating:

DELL Revenue Quarterly YoY Growth Chart

Source: DELL Revenue Quarterly YoY Growth data by YCharts.

Tabbed out
In its 10-K annual report, Dell cites the "mobility" business as one of its weakest. Sector revenue declined 20% on an 18% drop in units sold. Average selling prices also fell 2%.

"During Fiscal 2013, we experienced a difficult pricing environment for our client products. In particular, demand for our client products in emerging countries was affected as we saw a migration to lower-value offerings, where we are less competitive. Our results were also affected as customers shifted some of their demand to alternative computing devices, particularly in our Consumer segment," the report confesses. [Emphasis added.]

Translation: We aren't good at selling smartphones and tablets, which is a problem when you consider how important these devices have become:

Interestingly, this chart tells only part of the story. IDC also says tablet sales more than doubled last year in emerging markets, where Dell is weak. Smartphone sales rose 69% while overall device sales jumped 41.3% in these up-and-coming regions. Unlike Apple, Acer, Samsung, and many others, Dell isn't cashing in on any of the growth opportunity.

For Dell, time to hit "delete"
Valuation math notwithstanding -- and, yes, there is a decent case to make that Dell is worth more than it trades for today -- this isn't a turnaround story in the making, and it may never be. Dell's historic strengths may prevent it.

Meanwhile, tablets are becoming the computing form of choice, especially in the emerging markets. Private or public, from here on Dell's relevance is inextricably linked to its ability to compete for and win non-PC customers.

I'd love to see it happen. I just don't believe it will.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 29, 2013, at 4:47 PM, stocksandbombs wrote:

    To talk about Dell without talking about servers and the company's other efforts to compete more strongly in the datacenter is a huge miss. This article is fluff.

  • Report this Comment On March 30, 2013, at 9:01 AM, TMFMileHigh wrote:


    Thanks for writing.

    >>To talk about Dell without talking about servers and the company's other efforts to compete more strongly in the datacenter is a huge miss. This article is fluff.

    Let's review some facts:

    * Server revenue was up 11% in fiscal 2013, accounting for 16% of overall revenue.

    * Mobility revenue fell 20% over the same period. Desktop PC sales fell 8%. Combined, these two account for half of Dell's business, though, at 27%, Mobility is the company's largest and most important unit.

    * Server revenue got a boost from acquisitions. Again, from the 10-K:

    "During Fiscal 2013, servers and networking revenue increased 11%. This increase was *primarily attributable* to our Fiscal 2012 and Fiscal 2013 acquisitions of Force10 Networks, Inc., SonicWALL, and Quest Software, which are included in servers and networking revenue from their respective acquisition dates. In addition, revenue from our servers increased, as we experienced an increase in demand for our data center solutions during Fiscal 2013."

    I'm sure shareholders are hoping servers and networking gear can more than compensate for weakness elsewhere. That isn't happening yet, and given increased competition from Cisco and Oracle, it may never.

    Thanks again and Foolish best,



    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

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