Dell (NASDAQ:DELL) gives me pains in my stomach. Here's the problem:

I know a lot of really smart people -- the kind who can do math without looking at their fingers, read the financial statements without moving their lips, the whole package -- who love Dell right now.

"Chance of a lifetime," they might say, if I bothered to quote them. Let's just say the value crowd finds Dell cheap with a capital chuh.

But I don't see it that way.

No, I'm not going to obsess about the recent earnings for Q1 (you can get the numbers story here). The abridged version is that earnings dropped from last year's Q1, coming in at $0.33 a share. Revenues inched up 6.2%. And yes, some of the units grew more quickly than that: Mobility up 12%, Asia-Pacific up 17%, and America's international up 26%.

While investors seemed excited by that earnings release, I find it odd; the company just hit the target it set for itself earlier this month. Not too impressive, if you ask me. The enthusiasm must have been from the not-so-groundbreaking news that Dell would use some AMD (NYSE:AMD) chips in servers, right? (Pardon my yawn, but wake me when it's more than just servers; I might buy AMD and short Intel (NASDAQ:INTC).)

My problem with Dell isn't its recent bad quarter. Stuff happens, I realize that. My problem is that the margin erosion this quarter looks symptomatic of some long-term trends. Here are some quarterly figures:

Q1 2007

Q1 2006


Gross Margin




Operating Margin




Net Margin




And here's the longer-term picture:

FY 2002

FY 2003

FY 2004

FY 2005

FY 2006

Gross Margin






Operating Margin






Net Margin Ex Items*






Free Cash Flow Margin






*Net margins excluding one-time items. All data from Capital IQ, a division of Standard & Poor's.

From the conference call, it sounds to me like Dell's direction forward rests on a race to the bottom in price, with a race toward the top on service. Sell for less, spend more on service. How much do you want to bet margins continue to get compressed? Especially as competitors ranging from Hewlett-Packard (NYSE:HPQ) to no-name Asian manufacturers have started to realize the kinds of cost savings that used to be Dell's specialty.

How much are you willing to bet that increased sales (now there's an "if") will make up for that erosion? How you answer that question determines whether you think Dell is a buy.

Keep in mind that Dell and the other box-makers will likely suffer a slow summer and fall as users wait for the upgrades for the OS cycle to be ushered in with Microsoft's (NASDAQ:MSFT) Windows Vista. More screw-ups from Redmond could, of course, take this period of uncertainty out even further.

In short, I think Dell deserves to be cheaper, and I think the market will provide ample opportunity for that to happen. With all due respect to those smart, Dell-loving friends of mine, just give me a call when we get down to $20, OK?

Dell is a recommendation of bothMotley Fool Inside ValueandStock Advisor. You can find out why with a free trial of either.

Seth Jayson likes his no-name laptop much better than the Dell units he's been stuck with, which sounds like a problem for Dell. At the time of publication, he had shares of Microsoft but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.