Tuesday, November 01, 2005

Dell Slips Twice. Stock Off 9% Overnight.

Slip No. 1 -- the company is taking a $300 million charge this quarter to cover "the cost of servicing systems that included a vendor part that failed to perform to Dell's specifications." They have to replace lots of motherboards in enterprise Optiplex desktops. I don't yet have any information on whose part failed and why.

Slip No. 2 has been happening all year. This time the company fell down. Dell was overly aggressive on consumer pricing in the first half of 2005. Margins suffered, while units sold went through the roof. Recall that in the second quarter, WW PC unit sales were up 17%. Dell picked up a lot of that growth, but not profitably. The company said it would focus on more profitable, upscale consumer systems in Q3. Bad choice, as the company now has to write off inventory because sales are not at the level expected.

My first thought is that the execs at HP headquarters are going to burn the midnight oil with the accountants. HP's fiscal year ended last night, so the company can make adjustments with knowledge aforethought on Dell's health. Believe me, HP has hated being the weak sister to Dell the last couple of years. So watch HP's earnings announcement on November 17th.

Second, Intel's stock was also down today in sympathy. Dell sells only Intel processors, so Dell is a proxy for Intel.

Third, you can bet the Dell execs in Round Rock, Texas are asking what went wrong with their consumer strategy. One question that's bound to be asked -- again -- is whether AMD's repute for better performance in high-end machines and good value in low-end machines is finally hurting Dell in ways that can no longer be ignored or smoothed over with Intel marketing dollars.

Fourth, as I wrote in July, a 17% global PC unit growth is unsustainable long-term -- and Dell's stock story is all about sustainable growth with profits. Where's the sweet spot for the world's largest PC company? Dell's stock is down more than 17% on a five-year basis, meaning a lot of investors will now more loudly voice their dissatisfaction in the company's performance -- and strategy.

1 comment:

  1. My understanding is that the defective parts in the Optiplex line are motherboard capacitors. There have been rumblings of this for a while and one enterprise customer I am affiliated with experienced a 12% failure rate in the first 6 months of ownership.

    Dell has been slow to acknowledge this problem publicly and still is not forthcoming with details, but as far as I know, they have been swiftly replacing faulty units.



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