Dell Stock Gains May Slacken

The rally that's lifted the computer maker's shares 55% this year may lose steam after a report indicated corporate demand for PCs isn't as robust as hoped

By Aaron Ricadela

An eight-month climb in Dell's stock price may slacken after the computer maker tempered a previously upbeat forecast of business demand for PCs.

Dell (DELL) reported on Nov. 19 that sales sank 15% and net income tumbled 54% in its fiscal third quarter, which ended Oct. 30. What's more, Chief Executive Michael Dell suggested during a conference call after the results that businesses would take more time than previously expected to replace old computers with newer models running Microsoft's (MSFT) new Windows 7 operating system. "It won't all occur at once," he said.

The remarks contrasted with the CEO's contention in August that the PC industry would enter a "powerful product cycle" in 2010 that would benefit Dell. Wall Street "is going to feel like Michael Dell backed off a little bit on his comments on the replacement cycle," says one securities analyst, who asked not to be named since he hadn't yet published a research report on the quarter. "People are not going to like that." Dell's results look especially disappointing in light of a positive earnings report issued by rival Hewlett-Packard (HPQ) on Nov. 11.

Widespread Weakness

Investors sold Dell stock in extended trading after the earnings report was released. The shares fell 6%. At the end of regular trading Nov. 19, Dell's stock closed down 19¢, or 1.2%, at 15.87. Shares of Dell have risen 55% so far in 2009, but that run could be ending. "If you're trying to invest for six months, it's not a great place to be," says Jayson Noland, a senior analyst at investment firm Robert W. Baird, who has a neutral rating on Dell. "It's a cheap stock, but I don't see any near-term catalyst" that might keep the rally alive, he said.

Dell said third-quarter sales were $12.9 billion, and net income was $337 million, or 23¢ a share after excluding certain one-time items. Wall Street analysts had expected Dell to earn 28¢ a share on sales of $13.1 billion. Weakness was spread across Dell's businesses, as sales to large companies declined 23% from a year earlier, sales to small and midsize companies were down 19%, and consumer revenue declined 10%.

Because 79% of Dell's sales come from corporate and government customers—the majority of that PC sales—the company has been particularly hard hit as information technology departments have kept a tight rein on spending, even as the economy recovers. "We are losing share in the aggregate" because of a heavy reliance on commercial sales, Dell CFO Brian Gladden told reporters during a conference call after the results were announced.

Dell's losses have meant gains for rivals Hewlett-Packard and Acer. HP remains the top seller of PCs worldwide, with 20.2% unit share in the third quarter, according to market researcher IDC. Acer was second with 14% share, and Dell dropped to third from second, with a share of 12.7%.

No Boost from Windows 7 Yet

Windows 7, released Oct. 22, was supposed to jump-start flagging sales. Now, analysts say, companies are choosing to spend still-constrained technology budgets on other gear such as servers, disk storage, and networking equipment before they replacing aging fleets of PCs. "You will eventually see PC replacement, but it's three or four quarters away," says Baird's Noland. "In technology terms, that means we just don't know" when companies will begin replacing PCs en masse.

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