Shares of Round Rock,Texas-based computer maker Dell (DELL: Charts, News, Offers) soared in the middle of the week after it posted impressive earnings, reporting a net income of $927 million, or 48 cents per share, nearly triple the $334 million, or 17 cents per share, it reported in the same period last year. Excluding special items, the third largest computer company in the world earned 53 cents per share, far exceeding Street expectations. The company also posted a gross margin of 21.5%, higher than most forecasts of 18.6%, due to the falling prices of components such as LCD screens and memory chips. In addition, rumors of an upcoming attempt to buy struggling number two chip maker Advanced Micro Devices (AMD: Charts, News, Offers) boosted investor confidence in the company that has traditionally trailed industry leaders IBM (IBM: Charts, News, Offers) and Hewlett-Packard (HPQ: Charts, News, Offers).
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Dell currently has its workforce of 96,000 split across the United States (48.3%) and internationally (51.7%), and works closely with OEM suppliers in Taiwan for the majority of its components. Shares of Taiwanese OEM supplier Quanta Computers, which supplies 12% of Dell PC components, rose 4.5% with Dell’s confident outlook for fiscal 2011, in which the company forecast a 5-9% rise in revenue, which translates to $64-$67 billion, which surpassed the Street consensus of $64.4 billion. However, declining margins in Taiwan due to the falling U.S. Dollar and the rising Chinese Yuan have raised concerns that these component prices will soon increase, due to Taiwanese companies operating factories in Mainland China while exporting goods to the United States. This would put continued pressure on Dell’s margins.
Dell’s networking and servers revenue increased by 16%, while personal computer revenue climbed 10%, due to businesses upgrading outdated hardware. CFO Brian Gladden cited supply chain improvements, disciplined pricing and input cost declines as the primary reasons for the company’s highest operating income in five years. While the company’s quarterly numbers are certainly impressive, analysts believe that Dell’s revenue will peak soon as corporations finish upgrading their systems and margins begin to decline. Dell trails IBM and HP, and has been fighting for a larger market share in the IT and data center equipment market, and a foothold in the mobile arena of netbooks, tablets and smartphones. Dell must also shake off its last generation budget “Wintel” image if it hopes to remain competitive. Gladden stated that the mobile business of smartphones and tablets, which Dell has thus far fallen flat in, is currently “immaterial” to the company and will remain so for a “couple of years.”
It is obvious that Dell must continue its long tradition of mergers and acquisitions to keep up to its industry peers. In 2006, Dell acquired Alienware, the manufacturer of high-end designer Wintel machines, to offer a more aesthetic line of powerful gaming systems. In 2009, the company acquired Perot Systems, a leading IT provider to expand its IT presence. In December 2010, Dell acquired data storage company Compellent Technologies for $960 million. Chief marketing officer Paul-Henri Ferrand stated on a telephone conference, “We have made a steady number of acquisitions last quarter and we have every intention of continuing on that rhythm.
A rumor has surfaced of Dell’s impending acquisition of $6 billion chip maker AMD due to the departure of three high level AMD executives – CEO Dirk Meyer, COO Robert Rivet and Strategy Head Marty Seyer. Although this purchase could give Dell its own in-house processor and graphics card manufacturer under the ATI label, there are huge logical problems with this acquisition. A shift towards all AMD systems in a world run by Intel (INTC: Charts, News, Offers) processors would cater to budget consumers, but would alienate corporate customers and high-end gamers, for which Intel Core CPUs have become the de facto industry standard. However, after eliminating the redundancies and generating synergies, an acquisition of AMD could save the company significant amounts of capital and increase margins significantly.
Dell current manufactures personal computers, servers, data storage devices, network devices, software, computer peripherals, as well as HDTVs, cameras, printers and MP3 players. In each of these markets it is positioned against various strong domestic rivals, such as Apple (AAPL: Charts, News, Offers), Hewlett-Packard and IBM, as well as smaller overseas threats such as Lenovo, Acer and Asus. Shares of Dell currently trade with a forward P/E of 10.26 and have traded between $11.34 and $17.52 for the year.
Other News About DELL
Dell to buy AMD?
Tech blogs are ablaze with speculation.
Dell delivers strong fourth-quarter earnings
Dell lifts the tech market, but can its rally continue?
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Apple dominates once again.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
A white Knight will takeover AMD (and all investors go to heaven)? For what — To compete against Intel, Nvidia, and all the armies of China?
Who R U trying to bleed? R u the F that believes the BS that faith delivers victory?
The physics of economics reveals that, despite the road-bumps and unfocused details, the weak shall eventually perish.
One small fumble from the giant Intel adds only drama, not victory, to the story of AMD.
Time will be the judge of my judgement.