Dell (DELL) Dives as Profit Plunges 33%

Shares of PC maker Dell (DELL: Charts, News) plunged 17% on Wednesday after the company reported weak first quarter earnings. The Round Rock, Texas-based company posted adjusted earnings of 43 cents per share on revenue of $14.42 billion. Analysts had expected 46 cents per share on revenue of $14.91 billion.

The company attributed its lackluster bottom line, which slid 33% from the prior year quarter, to weak sales across all major sectors - consumer, business and public. Daily Chart
Analysts had originally forecast declining PC sales to bottom out in March and slowly recover throughout 2012, but Dell's full year guidance silenced those hopes. The company now expects full year revenue between $14.71 billion to $15 billion, lower than the $15.44 billion analysts had originally projected. Dell, which was a dominant force in home computing five years ago, has seen its market share chipped away by a revolution of smartphones and tablets started by Apple (AAPL: Charts, News). Since the beginning of 2005, Dell shares have lost 64% of their value. Even the return of founder Michael Dell in 2007, touted as a pivotal moment for the company, failed to keep shares afloat. Investors are concerned that Dell and Hewlett-Packard (HPQ: Charts, News), once the bellwethers of the personal computing sector, are being left behind the technological curve, in the same way the iPhone made mobile handsets from Nokia (NOK: Charts, News) and Research in Motion (RIMM: Charts, News) instantly look dated. While Dell could transfer some of the blame to Apple and macro factors from Europe, analyst expectations had already been significantly lowered. In addition, Hewlett-Packard, its closest industry peer, beat on both the top and bottom lines this week. HP was able to achieve these improvements through intense cost reductions, restructuring and layoffs. Investors are concerned that Dell isn't doing enough to slim down and spur growth. This disparity was also seen in earnings from Cisco (CSCO: Charts, News) and Salesforce (CRM: Charts, News) earlier this month - with the former missing but the latter beating estimates - which suggests that economic uncertainties are stress testing tech companies, and that some are unlikely to restructure fast enough to survive. Sterne Agee analyst Shaw Wu noted that it was a humbling quarter for Dell, which for the first time acknowledged that smartphones and tablets running on Apple's iOS or Google's (GOOG: Charts, News) Android system were evolving into a viable threat. Wu commented, "We are frankly not surprised as we have said in the past our belief that consensus was underestimating the competitive impact from Apple in both small and medium-sized business and enterprise markets." Looking forward, most analysts believe that Dell must follow in HP and IBM's IBM footsteps and focus on its higher margin server and service business to increase profitability. However, Dell's core business - personal computers - is unlikely to recover, due to intense competition from HP, Lenovo and a slew of other Asian competitors which are further fragmenting the market. By comparison, Lenovo, once an insignificant player from China, posted a 59% jump in profits this week, outpacing its industry peers. Lenovo shifted to tablets faster than its competitors, an agile move that companies such as Dell have been slow to match. Fundamentally, Dell is undervalued, trading at less than 6 times forward earnings. However, its growth rate is questionable, as the company has been slow to react to industry threats and to reduce its own expenses. Perhaps this quarter will be the wake up call the company needs to slim down. Other News About DELL Dell'sstrategyquestionedassharesdive Investors question Dell's defense against Apple, HP and Lenovo. DellSharesTakeThrashingAfterSourEarningsReport Dell posts its worst single day drop since 2000. Other Stocks in the News Hewlett-Packardtocut 27,000 jobs Hewlett-Packard slims down its workforce. BaiduCouldFall 50% ByMid-2013 A bearish take on the Chinese Google. Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. 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Published on May 25, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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