Qualiport

[ October 2, 2000 ]

Dell -- The Qualiport's Bad Apple?

By Maynard Paton (TMFMayn)

Carburton Street, London -- On Friday, I had the dubious pleasure of reporting the latest hi-tech woe from the US. Just a week after Intel (Nasdaq; INTC) had warned that their profits would be below earlier expectations, Apple Computer (Nasdaq: AAPL) announced that their forthcoming profits would be below previous forecasts too.

The disappointments have obvious connotations for the Qualiport. In my Fool's Eye View from Friday, I wrote:

"So, who will be next after Intel and Apple? Anyone for Dell Computer Corporation (Nasdaq: DELL), a member of the Qualiport? I must admit to being slightly nervous over the company's short-term outlook, especially when the company stands on a forward P/E of 36. After reviewing Dell's second-quarter performance, I think it will be very tough, but not impossible, for the company to achieve its stated 30% sales growth target. There could be an upset on the horizon... will we see Dell in next week's Friday morning news slot?"

My nerves stem from two points. Firstly, the rather rich market rating on which the company currently rests. Apple had traded on a prospective price to earnings (P/E) ratio of "only" 29 before a disillusioned stock market sliced its market worth into half...

And secondly, there is my lack of knowledge and following of the PC industry. This is, arguably, the more important issue of the two.

Let's take the Apple warning. Given the company's niche, "go it alone" type of approach towards the PC marketplace, there can be two points of view to be taken by Dell stockholders.

The bull case for Dell is that all of the problems are Apple-specific. For instance, the company mentioned that sales of its new G4 Cube had got off to a slower-than-expected start. Perhaps consumers just didn't like the new product and instead were attracted to other, more conventional, computers. The same could be said for Apple's reported sales slowdown in its educational market. Did those customers want the traditional "Wintel" machines instead? Perhaps demand has shifted more towards laptops, an area where Dell and others have a substantial presence. Also, Dell are very much becoming focused on the more higher-margin server market, a sector where Apple doesn't have much of a presence either.

The bear case for Dell is much simpler. Demand for PCs is slowing across the board and everyone in the industry will get hurt. Including Dell.

Hmmm...

Faith investing

To be honest, I have to agree with sentiments of Odysseus2000. In this post, Odysseus remarked:

"An investment in Dell, to me, is an investment in Michael Dell and his ability to exploit new markets before his competitors see them. And to be far better at it."

My belief in Dell, as evidenced by the Qualiport continuing to hold the stock, is through Michael Dell, the company's CEO. I know that Dell has exhibited a truly great financial performance in the past (albeit a performance that has markedly deteriorated in recent quarters) that merits Qualiport inclusion. But what I don't know at all is the future of PCs and the industry in the years ahead. Simply, I'm placing my investing faith in a man who obviously does know a thing or two about PCs, and to hope that he continues to keep his eye on the ball. "Faith investing", if you like.

The danger here, of course, is that this sort of reliance can lead to investment disaster. I'm sure there were many investors who have said in the past: "I don't know too much about PCs, but Steve Jobs has a great record and some great ideas, so I'll run with him and his company, Apple". This feature from the US Fool shows just how difficult it is to get it right when it comes to tech stocks.

Warren Buffett outlined his thoughts on investing in tech stocks in his latest Shareholders' Letter.

"Nevertheless, we believe these companies (in which we have large investments) have important competitive advantages that will endure over time. This attribute, which makes for good long-term investment results, is one Charlie and I occasionally believe we can identify. More often, however, we can't -- not at least with a high degree of conviction. This explains, by the way, why we don't own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage."

I have to say, I'm very much in the same "tech field insight" boat as Buffett.

Dell will release their next quarterly results in November. No doubt we'll see then if Michael Dell's prophecy of a 30% annual sales growth target is still on track. We'll also see whether my faith in Mr Dell continues to remain intact.

Independent Insurance

On the subject of Qualiport management, I'm visiting Michael Bright, Chief Executive of Independent Insurance Group (LSE: IIG) this Thursday. If you've got any questions that you would like Mr Bright to answer, how about posting a reply to this message on the Independent Insurance discussion board.

Cash, cash, cash

And before I go, a quick recap about the Qualiport's cash injections. The Qualiport enjoys a regular £2,000 cash boost at the beginning of every April and October. Thus, after the weekend, the Qualiport, even more than before, continues to wallow in lovely cash.

Where next?

Visit the busy Dell discussion board | website