Tonight's sales warning notwithstanding, the big question that's still sitting out there for longtime followers of Dell is just how much the firm's ability to increase its intrinsic value in the future has been impaired by the slower overall revenue growth rate in its core PC business.
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Dell's announcement that sales revenue will likely increase 7% from the previous quarter, well under the company's previous 10% guidance, sent shares down to a new 52-week low. In keeping with the theme established by the aforementioned tech bellwether companies, Dell blamed soft European demand as well as slower-than-expected sales to small business customers worldwide.
In a statement posted on its website, Dell was quick to reassure investors that profit margins haven't been adversely affected, and that the company is still "on track" to meet the company's profit estimates for the year. The company cited favorable component availability and cost as improving factors that should allow Dell to meet third-quarter profit estimates, although continued revenue softness could cause the company to miss profit targets by one or two cents for the fourth quarter. Assuming the slow demand persists, Dell projected full-year sales of $32 billion, a 27% increase over the previous year.
First Call's consensus estimate for Q4 was $0.28.
For Dell investors, sub-30% sales revenue growth going forward shouldn't be surprising. The key for Dell is to grow operating earnings -- without the benefit of large gains on investments -- and operating cash flow at rates greater than sales growth over the next couple of quarters and on into 2001. If Dell can do that, slowing sales growth need not be a painful experience for shareholders.
The big question that's still sitting out there for longtime followers of Dell is just how much the firm's ability to increase its intrinsic value in the future has been impaired by the slower overall revenue growth rate in its core PC business. As has been shown previously, the company's ability to grow free cash flow hasn't really been adversely affected by the top-line slowdown -- at least not yet.
Investors should expect that Dell's stellar return on investment capital will slip in the coming quarters, but it should still be well above the industry average and it will easily remain well above the company's cost of capital. Regardless of what is happening in places like Europe in the short-term, those factors remain the keys to Dell's business returns in the future. The stock market returns, however, are another matter entirely.
Dell made the announcement to coincide with the opening of its fall analyst meeting, which will take place today and tomorrow in Austin, Texas. A webcast of the event is available by visiting the company's website.
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