"I got a gnome in the backyard
I put him right on the X mark
He's supposed to show me where the money is
Hey, won't you show me where the money is"
-- "Oh, Mandy" by The Spinto Band
The consumer PC market has been a drag on Dell's results for years. These days, the company is happy to move away from that low-margin segment and refocus on more profitable enterprise sales. "This is a new Dell," says CEO Michael Dell. "We're growing Enterprise Solutions and Services, including developing and acquiring key IP and sales capability, and the result is growing earnings and cash flow."
In the just-reported third quarter, enterprise computing and storage stood for 31% of Dell's revenue, an all-time high. Rolling gross margins have improved from 19.5% to 22.6% in just four quarters, while net margins also increased from 5.3% to 5.8%. These strong margins come at the expense of slower sales growth, but third-quarter earnings still jumped 17% year over year, to $0.49 per share.
That's a trade-off I'd be happy to see in any mature business, such as computer sales.
You might recall Dell archrival Hewlett-Packard
Personally, I think Dell is on the right track and that HP would have been wise to follow suit. Leave the hardly profitable sales to revenue chasers like Lenovo or Acer and grab more of the more enriched and enriching business-class revenue instead.
This strategy is paying off handsomely for Dell. I slapped a thumbs-up CAPS rating on Dell three months ago, when I saw the first signs of this long-term shift. The stock has indeed beaten the market since then, and I believe that the outperformance will only get bigger in coming quarters. The enterprise strategy hasn't played out yet, and investors may not have noticed what's going on -- so there's opportunity to be mined from that under-the-radar situation.
Will Dell be the next market-crushing IBM
Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of IBM. Motley Fool newsletter services have recommended buying shares of Dell. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Fool has a disclosure policy.