Dueling Fools
July 07, 1999

Farmers in the Dell
The Bear Rebuttal
by Rick Aristotle Munarriz
([email protected])

From the home office in Dellbear, Texas, here are this week's top ten rebuttals...

1. Dell the brand. Right now, at Fool HQ, a sea of Dells sit next to a collection of Compaqs -- in perfect harmony. How can this be? True brands stand apart. At a restaurant you don't find Heinz next to a bottle of Hunt's. Good luck ordering a Pepsi alongside a Diet Coke. Real brands create buffers and that is not the case in this commodity box world, save for maybe Apple <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>. Specs. Prices. Terms. Everyone is buying the same components from the same suppliers.

2. Still growing. Yes, Dell is growing, but now at a slower rate than analysts expected. Yi-Hsin points out how the stock had shot up 10,000% over the past five years and that kind of glorious return also comes with a great deal of baggage. In Dell's case, Wall Street discounted much loftier projections. Losing a third of that exuberance is only the tip of the iceberg if Dell continues to slow down -- and sadly that's the way things are trending. Why else would a technology company be down as the market hits new highs?

3. Companies go Dell. My capable Dueling foe lists some recent corporate handshakes. I guess that means I can't say that Dell sales will be zero next year. I'm sunk. But let's put things in relative terms. She seems impressed with a Choice Hotels deal that will average about $27 million a year. Dell would have to line up 3500 similar contracts for the sum to equal Dell's market cap. Yet the Choices are few. Thanks to ever-shrinking computer prices, only a few companies are getting locked up in long-term exclusive contracts. The old axiom about no one ever getting fired for buying IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> is pretty laughable now. Computer brand loyalty is a thing of the past. I've seen the future of office computing and its color is mulatto.

4. Efficient business model. Dell had one. There is no way, despite being decked out in full bear regalia, that I can deny that. However, everybody has the bomb. With Compaq now copying the "Be Direct" model, what do you think will happen? Competitive pressures will drag prices and margins lower. Sure, inventory might still be lean, but don't empty out your piggy bank to wager that Dell's return on invested capital will remain as high as it has been in the past.

5. Customer satisfaction. I'll admit it. I've never owned a Dell computer system. I've been through a few different machines in my life and I'm not as clear on this brand loyalty thing as my Apple-loving wife. I appreciate Yi-Hsin telling me that her Dell monitor went berserk, though. I've never had a buggy monitor before so I'll make sure I stay away from the Dell line. Maybe if I were sold a bunch of shoddy peripherals to the point where I had to test a company's customer service department I might grow to form a favorable opinion. Maybe? Or maybe I'd just lose my patience and move on to the next commodity vendor.

6. Best Internet play. Dell is using the Internet like any direct seller -- as just another medium to place an order beyond fax, phone, or mailbox. It's not as if the 'Net will be replacing costly bricks-and-mortar locations for Dell. Dell was lean before the Internet. Actually, maybe it's coincidence, but as its online sales grow the company's margins shrink. Okay, it's a coincidence, but it is misleading to compare Dell with the e-commerce juggernauts. Compare it to an automaker like Saturn for allowing online ordering convenience -- nothing more.

7. International domination. I'm sorry, is this a Compaq Duel? I realize that Dell is forging ahead in Europe and doing marvelously well in places like the United Kingdom. But, maybe it's just me, I usually associate the word "domination" with being #1 and Dell just isn't there. The one geographic claim that Yi-Hsin writes, about Dell being the eighth largest PC seller in China is interesting. I imagine the market caps of the seven largest players in China combined fall shy of Dell's ambitious price tag.

8. The PC market is alive and well. Of course it is. Computers are getting better and cheaper. Its household penetration is almost worthy of dubbing the PC an appliance. Which begs the question, when was the last time you found a publicly traded washing machine or television set manufacturer going for Dell's multiples?

9. Michael Dell. What can I say? Michael's story is amazing -- as is the tale of every self-made billionaire. Yi-Hsin writes that "Dell is richer than Bill Gates was when he was 34 years old." Yet Michael was even richer when he was 33. Gates has yet to peak while Michael may have -- and he's quite savvy for having periodically divested himself of the company that bears his name. Comparing Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> to Dell, by CEO insinuation, is not worth much of a response. One sells a proprietary product. One presses a four-letter word on computer boxes.

10. Investor friendly. I applaud the investor friendly companies. Shareholders deserve the same respect and access to information as the institutions and, no question, Dell serves its investors well. Go, Dell, Go! However, good intentions do not necessarily go hand in hand with capital appreciation. I'm sure Starbucks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBUX)") else Response.Write("(Nasdaq: SBUX)") end if %> individual investors enjoyed getting richer while being kept in the dark for years as opposed to being poorer and illuminated today.

Ultimately it all boils down to what you think the future will bring for Dell and the boxmakers. The days of Dell doubling or tripling earnings are over. Next year's 34% projected bottom line growth is impressive but it is coming in uncertain, competitive times. Like Dell's machines, its share price has gotten cheaper in recent months. I'm sure somewhere, somebody is saying "no one ever got fired for buying Dell" and maybe not grasping the comedy of an ever-changing commodity-based climate.

I know it's hard to look ahead when you have such a tempting back-story as you do with Dell. But do it because that's what the market will eventually be seeing. And what do I see ahead of me? My monitor. Not a Dell monitor. And it's not going berserk.

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