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August 11, 2005

Time to Reboot Dell

Dell reported second quarter results at the market close today and immediately tumbled more than 7% in the after-hours session. The disappointment came in the form of missed revenue numbers. Dell reported $13.4 billion in revenue versus previous guidance of at least $13.6 billion. The revenue miss is doubly disappointing since Dell made a monster revenue push at the end of the quarter by slashing prices dramatically. I had expected them to make the revenue number, but miss on margins. Interestingly enough, they made their per-share earnings number despite the revenue miss.

Dell faces a difficult battle. They are operating in a market segment that is suffering falling prices and continues to become more commoditized. The latter attribute means that margins will continue to be squeezed as prices fall. Dell realized this dilemma early and has confronted it by adding products (such as printers, made by Lexmark and branded Dell) to their offerings. Sales of printers have been brisk, but again at the expense of margins. (Dell has been in a price war with HP for some time.)

Additionally, it's difficult to discuss a retailer's results without bringing up the housing boom. All our societal economic statistics make it apparent that the U.S. is enjoying a consumption binge at the expense of home equity. If housing is indeed cooling, as some recent data may indicate, Dell could be in for far bigger disappointments in coming quarters. Reality is catching up with them.

Interestingly, Intel slipped nearly 2% in the after-hours session, although there was nothing new on the wire. Likewise, AMD slipped about 1% after the close. Perhaps the results at Dell are making people think about the prospects for the chip makers. It is quite atypical for main street to think things through that quickly. However, they are missing a bigger picture. With performance pressures building at Dell, they need to take steps to protect margins while assuring product quality. The most obvious way to begin implementing such steps is to rescind exclusivity with Intel for processors. Which make today's results from Dell very good news for AMD.

(Despite my optimism for AMD, you will note in today's disclosure statement that I am holding AMD puts. This is only a technical trade and is intended to be brief.)

Disclosure: Short INTC; Long DELL, AMD Puts


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