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Dell's strategy questioned as shares dive

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05/23/2012 | 10:29pm CET

Shares of Dell Inc (>> Dell Inc.) plunged 17 percent Wednesday after a disappointing revenue forecast spurred fears that global tech spending is weakening faster than anticipated and raised doubts about the PC maker's strategy.

Shares of Dell Inc (>> Dell Inc.) plunged 17 percent Wednesday after a disappointing revenue forecast spurred fears that global tech spending is weakening faster than anticipated and raised doubts about the PC maker's strategy.

The stock plunge erased more than $4 billion in the company's market cap.

Rival PC maker Lenovo Group Ltd (>> Lenovo Group Ltd), which reported results overnight that benefited from its dominance in the rapidly expanding Chinese market, fueled concerns after warning that it too saw a slowdown in U.S. and European corporate spending on PCs.

Shares of global leader Hewlett Packard Co (>> Hewlett-Packard Company) closed 3.2 percent lower at $21.08 on expectations the company would announce a restructuring and sweeping layoffs after the market closed. HP said late Wednesday it would lay off about 27,000 employees or 8 percent of its workforce as it eyed more than $3 billion in savings.

The accelerating popularity of mobile computing devices such as Apple Inc's (>> Apple Inc.) iPad has been eroding PC sales for years. To combat the erosion in sales to consumers, as well as dwindling margins as companies compete on price, Dell and HP have been gradually focusing more on sales to large enterprises.

Dell has been diversifying its revenue base in the face of weakened consumer demand, giving up low-margin sales to consumers and moving into higher-margin areas, such as catering to the technology needs of small and medium businesses in the public sector and the healthcare industry.

The company now finds itself lagging larger rivals like HP and IBM (>> International Business Machines Corp.) in the race to become one-stop shops for corporate IT needs.

Shebly Seyrafi, analyst with FBN Securities, said it was a "tough call" whether Dell's diversification strategy is working.

"The revenue slide does raise doubts about their strategy," Seyrafi said, adding that it appears Dell is waiting for the launch of Microsoft's Windows 8 software that will help it become a stronger player on the tablet market.

"It's all bit of wait and see," he said.

Also, many analysts now see this transition, which Dell began a few years ago, as a lengthy process.

"While we think that Dell's story of improving mix is still valid, it will take a long time to play out," said BMO Capital Markets analyst Keith Bachman.

Dell shares have lost half their value since the high-profile return of founder Michael Dell to the company's helm in January 2007. His return was hailed as pivotal in regaining the market share ceded to an aggressive HP in the preceding years, but in five years Dell has continued losing ground, especially in the consumer arena, to HP and Lenovo.

RUSH TO CUT

Once the world's top PC maker and a mainstay of business-school case studies, Dell has been losing market share and now vies with Asian PC makers like Lenovo.

Lenovo can rely on China to propel revenue growth and boost its bottom line. The company commands more than half of the world's second-largest personal computer market.

"IT demand softened unexpectedly in the month of April," Raymond James analyst Brian Alexander wrote. "While Dell walked away from business as the quarter progressed, it initially took more deals that did not meet its profit objectives."

Dell shares closed 17.2 percent lower at $12.49 on the Nasdaq. Earlier in the day, it forecast revenue of $14.7 billion to $15 billion in the current quarter, well short of analysts' average forecast of $15.4 billion.

Wall Street brokers, including RBC, Jefferies and Evercore, cut their price target on Dell shares.

A cautious IT spending environment and challenges in its PC business will keep dogging Dell in fiscal 2013, BMO Capital Markets analyst Jung Pak wrote in a research report, cutting the price target on the stock to $16 from $18.

Analyst Rob Cihra of Evercore Partners said Dell may be forced to cut prices in order to boost revenue.

"We think Dell continues to walk away from just too much business in the name of margin stability," Cihra said in a research note.

"We just don't see how Dell can keep trying to avoid competitive pricing," he added, noting that the company will otherwise have a hard time differentiating its computers, which like rivals' products are based on Intel Corp (>> Intel Corporation) chips and Microsoft Corp (>> Microsoft Corporation) software.

Dell's first-quarter earnings and revenue were also lower than expected, hurt by weak sales to consumers, large enterprises and government units.

"The non-PC transformation is not big enough yet to absorb acute pains in PCs," said JPMorgan Securities analyst Mark Moskowitz, who cut his price target to $19 from $21.

(Reporting by Poornima Gupta in San Francisco, Supantha Mukherjee in Bangalore and Sinead Carew in New York; Editing by Edwin Chan, Joyjeet Das, John Wallace and Matthew Lewis)

By Poornima Gupta

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