Dell (Nasdaq: DELL) lost its No. 1 place in PC market share to Hewlett-Packard (NYSE: HPQ) in 2006 and has been unsuccessfully struggling to regain its former glory ever since. Now, after years of looking like a turnaround that wouldn't ever turn, the company's recent earnings report suggests that Dell could be in the early stages of a turnaround. The company's new XPS 15Z notebook, announced on May 24, provides more evidence that Dell's stock could be poised to take off.
The XPS 15Z is Dell's answer to Apple's (Nasdaq: AAPL) ultra-cool MacBook Air. Its predecessor, the Dell Adamo, was a series of mistakes that was put out of its misery in February.
This time it looks as though Dell got it right. CNET describes the XPS 15Z as "much more in line with what people have come to expect from Dell nowadays: some thoughtful style, decent quality, but still very accessible to mainstream consumers." I like that Dell is no longer trying to be something it is not (such as a company that can out-cool Apple). What's more, the XPS 15Z's $999 price tag is competitive, in contrast to the Adamo's initial price of $1,999 -- which had one reviewer lament that the Adamo was "hurt badly through the price-to-performance ratio."
Even more importantly, the XPS 15Z offers evidence that Dell is finding its way as a company. In the past year, after killing off its Studio and Adamo product lines, Dell's consumer lineup shrank from five to three brands: the basic Inspiron, the XPS for consumers willing to pay more for style and performance, and AlienWare for performance-oriented buyers such as gamers.
Dell's attempt to pare and focus its product line looks like a page from the playbook Steve Jobs used when he streamlined Apple's product roster and launched the market-share-gaining iMac in 1998. As part of its decision-making process, Dell observed customers using technology at home to better understand consumer needs and wants. Dell executives report that their Adamo experience "shaped" the way the company thinks about people, especially its customers. That's good. It is so much easier to hit a target when you see it well and understand the environment.
Of course, even in its better years, Dell's consumer business contributed less than 10% of operating profits. There is a potential halo effect, though, with small-business buyers. Small and medium businesses account for roughly one-third of Dell's operating profit.
There's evidence Dell is starting to get enterprise computing, too. The company's latest earnings release suggests that the company has moved to executing around customer needs and profits. It's as if Dell has borrowed a page from IBM's (NYSE: IBM) playbook. In case you missed it, IBM is a well-oiled cash-generating machine that has outperformed the S&P 500 and Nasdaq indexes this year.
Foolish takeaway
Dell's XPS 15Z is one more reason I think the company may have turned the corner. But analysts are forecasting EPS growth of only 2% over the next three to five years, and the stock is trading at a paltry 8.6 times forward P/E ratio. If Dell is in the early stages of a turnaround, investors who get in now at about $15 to $16 could find themselves holding a $26 stock in a few years.
What do you think? Is Dell finally turning the corner? Is the stock on its way to $26? An easy way to stay on top of market developments is The Motley Fool's free new My Watchlist feature. You can get up-to-date news and analysis by adding these stocks to your Watchlist now.
