Worst Stock for 2008: Dell

Resolve to keep your portfolio healthy: Help us pick the worst stock for 2008.

With Apple (Nasdaq: AAPL) claiming the title of "Best Stock for 2008," it shouldn't be too surprising that one of its competitors -- Dell (Nasdaq: DELL) -- is my nominee for "Worst Stock for 2008." No, I'm not suggesting that Dell will fail in the long term -- in fact, the company has been recommended by both our Stock Advisor and Inside Value newsletters -- but there are three factors that will negatively impact Dell in 2008:

1. Dell's reliance on the United States.
2. Increased competition domestically and internationally.
3. Lack of innovative products.

Coming to America
Dell has always derived most of its revenue from the U.S. Although this dependence is slowly decreasing, as of the end of this past fiscal year, 56.4% of total revenue came from the States. With hints of a recession and a volatile start to the year, companies that depend on domestic revenue for a majority of their sales will be hit this year.

On top of signs of a weakening market, Dell relies heavily on U.S. businesses for most of its top line. According to my calculations, about $25.3 billion, or 78.2%, of total U.S. revenue came from U.S. businesses last fiscal year. According to IDC, IT spending will be sliced in half in 2008 -- to about 3%-4%, down from 6.6% in 2007. Given this one-two punch on Dell's primary revenue drivers, look for the company to try and offset this growth internationally.

Hey, it's crowded in here
The other part of Dell's equation is the consumer side, and there are two ways to play this market: sticker price and innovation. Until recently, Dell's competitive advantage was utilizing its efficient direct-business model to cut out the middleman and provide generic models to the masses. However, in the PC market today, a constant flood of companies, such as Hewlett-Packard (NYSE: HPQ), IBM (NYSE: IBM), Lenovo, Sony, and Gateway, are constantly lowering prices. They're all offering AMD (NYSE: AMD) or Intel (Nasdaq: INTC) chips, and they're all preloaded with the latest Microsoft (Nasdaq: MSFT) software. According to Dell's latest 10-K, competitors offered "aggressively priced products with better product recognition and more relevant feature sets," leading Dell to lose market share in the U.S. consumer market.

This increased competition has taken a toll on Dell's revenue growth. While Dell used to grow its top line by double digits, sales growth has recently been marginal -- or in the low single digits.

Show me the innovation
If the consumer market is overcrowded with inexpensive alternatives, Dell has to find another way to stand out in this increasingly commoditized business. It's rushing to design innovative products for which it can charge a premium price.

But after viewing Dell's website dedicated to the Consumer Electronics Show (CES) -- where companies show off their wares for the year -- I don't believe that Dell will introduce anything disruptive in 2008. Its "Alienware" and World of Warcraft product lines don't seem innovative -- they're more like beefed-up hardware in a painted box. If Apple's growing market share is any indication, people want sleek, stylish products that are user-friendly, not Dell's bulky cookie-cutter models.

What's in store for '08
Dell has its work cut out for it this year and beyond. Even in the face of a massive buyback, Dell will need to overcome hurdles like competition and innovation to maintain its market share and stay relevant to today's consumers. The struggle will show on the company's performance this year. Your money would do better elsewhere -- say with a high-yield dividend stock or an international stock that won't be affected by all this U.S. commotion. That's why Dell gets my nomination as the worst stock for 2008.

If you agree, head on over to Motley Fool CAPS and rate Dell an underperform. Then tune in later this week, when we reveal which stock our readers believe is the worst bet for the new year.