Put another quarterly earnings release and another share-price beating in the history books for Inside Value selection Dell (NASDAQ:DELL).
Having just completed the Fool by Numbers piece covering some of the most important year-over-year financial results, I find it hard to locate a bright spot. Sure, I guess revenues were up 5%, and the share count was down 8%, but with margins and cash flow getting hammered, it's tough to be optimistic.
Dell still has a very strong balance sheet, but even that is showing signs of weakness. The cash balance is down, largely because of share repurchases, but also because of increased investment in working capital. Of course, investment in working capital is normal for a growing business, but Dell's investment in inventory is outpacing its sales. Part of the charm of Dell's business is the company's light inventory model, and all things considered, it's still a light business model. But the trend deserves attention.
With its financial performance falling apart this year, the last thing Dell needs is an SEC inquiry that questions the integrity of the company's revenue recognition and other accounting practices. Yet that's exactly what's happening -- and as you might expect, the stock is reacting poorly to the news.
Meanwhile, Hewlett-Packard (NYSE:HPQ) is showing strength, and even Sony (NYSE:SNE) seems to have found a bottom as it actively cuts a lot of the fat from its operations. There's also the additional competitive threat from Asian competitors such as Acer and Lenovo to consider.
I'm hardly ready to forecast the end of Dell or the death of the advantages of its direct model. I am, however, beginning to wonder whether the PC needs of the masses have changed. Is picking up a good, reasonably priced PC at the store now good enough? Does getting the best performance for the dollar no longer matter, since PCs are cheaper and have much longer lives? I'm inclined to think so, and that's not a good thing for Dell.
Microsoft's (NASDAQ:MSFT) release of its Vista operating system at some point during the next six months should spur a bit more demand and provide a better idea of where things are going. But if margins stay at this level, Dell's shares aren't as undervalued as some investors may think.
Microsoft is an Inside Value selection. Dell does double duty as an Inside Value and aStock Advisorpick. You can try out any of our investing newsletters free for 30 days.
At the time of publication, Nathan Parmelee owned shares in Microsoft, but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
