Earlier this week, we talked about Cisco’s (CSCO) facelift and how the company is now looking 15 years younger. At one point, Cisco was pretending to be a growth company. But it soon realized that it was all a façade when it looked in the mirror and reality kicked in; it was no longer growing. The premise of that discussion evolved around “corporate images”; essentially, how companies perceive themselves versus what its record says it is. There are many realities in life, but there is no greater reality than when one looks in the mirror and sees flaws. Wall Street does not take kindly to these flaws and neither does it offer apologies to companies for the punishment it unleashes as a result.
Last week, upon Cisco’s stellar earnings report, I decided to take a gamble. I made a trade that may have proved costly, but it’s still too early to assess the degree. In the section of the article titled “How to play Cisco’s results", I said the following:
Astute investors should take notice of the stellar numbers produced by Cisco as there may be some lingering effects. In particular, Hewlett-Packard (HPQ) and Dell (DELL) are two heavily exposed technology giants that may also have some surprises to announce. Dell will step to the plate first on Tuesday and HP reports on Thursday. Investors of Hewlett-Packard in particular, which is also in the routing and switching business, have to feel pretty good about Cisco’s numbers.
As I have been known to do, I took my own advice and established a position in Dell. After all, I consider myself a value investor and clearly by my estimation, Dell was not only great value, but it also presented an opportunity for some significant premiums to the tune of 25%. (At least I thought)
Tuesday after market closed, Dell reported earnings that caused me to revisit an article I wrote last week regarding Sirius XM (SIRI) and dealing with investor regret; a feeling that is as common as the air we breathe. While listening to the conference call, I realized that I bought too soon; where Cisco’s price jumped on the announcement, Dell’s stock got pummeled during afterhours, trading falling nearly 8 percent though its net income rose 63 percent for the quarter.
The company said it earned 54 cents a share minus items for the quarter ended July 29. That's up 69% from the year-ago quarter and 5 cents above analyst views. The company said vendor settlements added 4 cents to its EPS. Sales, however, came in light at $15.66 billion, up 1% but short of the $15.76 billion predicted by analysts.
Although corporate and government sales were performing better than expected, Dell proceeded to cut its full year revenue forecast, citing the collapse of consumer demand for personal computers as a result of not only high unemployment but also because of prevailing interest in the tablet and smartphone market created by Apple (AAPL), Google (GOOG) and Research In Motion (RIMM).
This should not have come as a surprise, as the market trend for PCs versus tablets had already shown a significant shift over the past four quarters. In fact, Google’s acquisition of Motorola Mobility (MMI) should signal what may start to be some serious consolidation in the smartphone and tablet markets in the years to come.
If you can’t beat ‘em, join ‘em!
Dell has a great chance at redemption, but it needs to get creative. In order to move forward and avoid the malaise that has plagued Cisco and Microsoft (MSFT), Dell needs to acquire Research in Motion and it would immediately become the third player in the tablet and smartphone market with a better management team to compete. Although Dell may not have the cash on hand to make such an acquisition at the moment, the type of capital that it will require can easily be raised with minimal effort. Innovation has always been a great driver of a stock. To date, Dell has not shown that it has the ability to innovate. But the great thing about the stock market is that facelifts are often just one acquisition away.
Dell also has a chance at breaking away from its corporate slow growth mold into a behemoth of innovation. The company can once again become very attractive by transitioning from such heavy reliance on computers and transform itself into the areas of content delivery in order to become a diversified tech provider; an acquisition of Sirius XM Radio (SIRI) comes to mind. Sirius would immediately present Dell with close to 70% of the automobile market, while also providing satellite assets that would instantaneously allow Dell to enter the market of CDNs (Content Delivery Networks). The smartphone and tablet offerings from RIM could then easily be integrated with satellite receivers that would top those offered by both Apple and the Android platform.
There is also something in the market called “wishful thinking”. I realize to some extent that this article fits that category, but there were many who also wished that Google would make the acquisition that it did this week. So for those investors, the wish came true as Google offered a resounding 60% premium above Motorola Mobility’s most recent closing price. The question is, will the investment pay off? In Dell’s case, it is being left behind by those in the tablet and smartphone markets. It has a chance to immediately enter the realm of innovation, reinvigorate growth, return value to shareholders and return its status as a tech bellwether. But these will come at a price -- one that it should consider paying for RIM or Sirius or better yet,both. Hey, a man can wish, can’t he?
Disclosure: I am long SIRI, DELL, CSCO.