Dueling Fools
July 07, 1999
Farmers in the Dell
Bull Argument
by Yi-Hsin Chang ([email protected])
To me, Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> has been and will continue to be a compelling stock story, but it is especially interesting now considering its share price has come down more than 30% from its 52-week high of $55 (click here for the latest stock price). Still, Dell's long-term stock performance is nothing to sneeze at. As this 5-year chart illustrates, Dell has had quite a run -- yes, it's increased more than 10,000% during that time, and that flat blue line represents the S&P 500 index on a comparable basis.
Dell has fallen somewhat out of favor of late due to a whacked view that PCs will soon be a thing of the past, not to mention an exaggeration of a slight slowdown in growth at the company. Nevertheless, I remain firmly bullish on the company for the long term, as bullish as Randy Befumo was when he wrote the Bull argument in the original Dueling Fools on Dell two years ago.
Here are 10 reasons why Dell's a winner in my book:
1. Dell the brand. Dell is one of the strongest consumer brands out there. Thanks to its aggressive advertising campaign, you often hear people talk about owning or buying a Dell -- as opposed to something from the "cow company," as I've heard someone refer to Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %>. Not only did Dell pioneer the "Be Direct" sales model, it has made it into an art form. The company was recently ranked fourth in a list of America's most admired companies in Fortune magazine, ahead of Warren Buffett's Berkshire Hathaway, Wal-Mart, Intel, and Walt Disney.
2. Still growing. Despite all the ruckus, Dell is still a rapidly growing company. In the quarter ended April 30, revenue grew 41%, operating income gained 40%, net income jumped 42%, and earnings per share increased 45% year-over-year. Many companies would give their CEOs for such numbers. The comparable figures for Gateway are 22%, 29%, 31%, and 29%, respectively -- mind you, Gateway is no lightweight, as Dale Wettlaufer has pointed out many times in the Boring Portfolio. In fact, Dell grew 2.5 times as fast as the estimated industry average.
3. Companies go Dell. Dell is the No. 1 PC vendor to small and medium-sized businesses as well as to large corporations. The company also has recently landed sweet deals to be the exclusive computer supplier to Boeing, Ford, Choice Hotels (in a deal worth up to $80 million over three years), and others. This was in addition to Dell's existing agreements with Sara Lee and Mobil.
4. Efficient business model. Dell simply rocks when it comes to running an efficient business. At the end of its fiscal first quarter (ended April 30), the company had six days supply in inventory -- and you thought eight days supply was awesome a year ago (Gateway's stands around nine days). Dell's return on invested capital -- which measures how efficiently a company is run and is the very basis of bonuses at Dell -- was 189% for the quarter.
5. Customer satisfaction. Dell's direct-sell business model is by definition customer focused. I speak from firsthand experience -- my computer at home and at work are both Dells -- and I've been happy with my experience. Even when my monitor at home went berserk, Dell sent me a new one the day after I called. I simply returned the broken monitor in the same box the new one came in, and I didn't have to pay a cent on shipping or even lug the box to the post office; Airborne Express came and picked it up. It was probably the most trouble-free exchange I've ever made in all my shopping experience. Not surprisingly, Dell's excellent customer service instills strong customer loyalty -- I'm in the market for a notebook computer, and I'll likely end up buying a Dell.
6. Best Internet play. Dell sells more than $18 million in computer equipment from its website every day, which accounts for some 30% of total revenues. Founder and CEO Michael Dell envisions deriving half of the company's revenues from the Internet by the end of next year and is applying the Internet to its entire business. Dell's efficient direct-sell model has made a natural transition to e-commerce. In short, it's out-'Netting the so-called Internet companies. Here's a company that's doing business online, and (shock) actually making money.
7. International domination. European revenues gained 29% last quarter, while revenues in the Asia-Pacific soared 48%. In both regions, shipments increased at more than twice the regional industry rate. According to the June 21, 1999, issue of Fortune, Dell is well on its way to becoming a major player in China, which is on track to surpass Japan as the world's second-largest PC market in about five years. Dell, which opened a factory in Xiamen in May, actually managed to increase sales during Asia's recent economic crisis. Since it started selling PCs there last August, Dell has already become China's eighth-largest PC maker, with a 1.2% market share. Dell aims to control 20% to 25% of the world's PC market.
8. The PC market is alive and well. As Michael Dell said in a recent interview with Barron's magazine, the "PC remains the preferred way to get access to information, and it is going to be at the core of the computing world for years to come." It will be a long time before a PalmPilot-like device can do everything a Dell PC can, and who's to say that Dell won't get to that point first with its ever-shrinking notebook computers? What's more, much of the world outside of the U.S. remains void of PCs and in need of computers.
9. Michael Dell. This is a guy who built an incredible business from scratch. Dell started his computer business with $1,000 while a student at the University of Texas-Austin and has since managed to grow it to the 78th-largest U.S. corporation among Fortune 500 companies with $18.24 billion in revenues last year. Think of it this way, Dell is richer than Bill Gates was when he was 34 years old. Enough said.
10. Investor friendly. Dell is one of the most investor friendly companies around. Its quarterly earnings press releases include such informative details as current and quick ratios and return on invested capital. It has a nice Calendar of Events page on its website, where you can sign up to receive reminders via e-mail of upcoming events. The website also features replays of its quarterly earnings conference calls and other major announcements.
For all these reasons, Dell is without doubt one of the best companies around. I can't be any more direct: Dell rocks, and I'm sticking to it.
Next: The Bear Argument