Is Dell Digging Where the Gold Is?
Is the PC dead? Well, I think Dell's (NAS: DELL) disappointing third-quarter numbers and its decision to focus more on servers, network equipment, and services is some indication of what the future holds for the PC, especially in the U.S.
The third-largest PC maker, bogged down by low sales in the U.S. and Europe, is shying away from its mainstay. Let's dig into Dell's dealings and dilemmas.
Delving into the numbers
Falling below analysts' expectations, Dell's revenue remained flat at $15.36 billion as it stayed out of the low-end market in order to defend its overall margins. By doing so, Dell may have lost nearly $2 billion in potential PC sales. The company has chosen to focus on serving business customers and government agencies, which comprise more than half of its sales.
The shift in focus is reflected in the company's revenue mix. PC sales to consumers were 6% lower and sales of laptops declined 2% compared to the same period last year. On the other hand, Dell saw 13% higher sales of servers and networking equipment along with a 10% increase in services-related revenue. Dell plans to make more acquisitions in order step up its hardware and software offerings for corporate and government clients.
Net income, though, beat expectations, growing 9% to $893 million. This was on account of lower cost of revenue, lower taxes, and the absence of restructuring charges that were present in the previous year's quarter.
Mountain of problems
The recent floods in Thailand that hit the hard drive supply have given Dell executives many a sleepless night. This has pushed up prices of hard disk drives made by companies such as Western Digital (NYS: WDC) and Seagate (NAS: STX) by $10 to $25.
Dell's woes have also been compounded by price competition in the personal computer space from rivals such as HP (NYS: HPQ) and Lenovo. Over and above that, the increasing popularity of tablets such as Apple's iPad and tablets running on Google's Android operating system have given laptop and computer manufacturers a run for their money.
Apart from these problems, Dell has also been in the doldrums on account of the European crisis and high unemployment rates coupled with lower consumer discretionary spending. This has translated into low consumer sales in the U.S and Western Europe and a slowdown in orders from the federal government. However, there is one silver lining among all these problems in the form of low RAM prices, resulting from oversupply. But let's come back to Dell's shift in business focus.
While Dell's decision to shift focus to high-margin enterprise customers may be a good way to shore up margins in the short term, it also could pull back on revenue growth. Moreover, Dell not only faces fierce competition in the PC space but also in the enterprise business market. So by running away from its equally important PC business, Dell may not be doing itself a favor. This leaves me wondering whether Dell is truly digging where the gold is.
The Foolish bottom line
The odds against Dell are piling on -- economic uncertainty, waning PC popularity, high levels of competition, and supply chain issues. For these reasons, I'm staying away from Dell for now.
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At the time this article was published Fool contributor Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Western Digital. 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 opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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