It Will Get Worse For Dell Before It Gets Better

Mar.26.12 | About: Dell Inc. (DELL)

Dell Inc (NASDAQ:DELL) used to have a strong business model. Michael Dell redefined the value chain using a just-in-time inventory system that lowered costs and increased revenues for the process. Since its stock price reached its plateau in 2005, the company has taken a turn for the worse. Its product quality has dipped below the industry standard and its customer service has been worsening since being outsourced. In this article, I explain why things may get worse for Dell before they get better.

The company is still expected by analysts to have 5.84 percent earnings growth over the next five years, which is well below the industry average of 13.32 percent. These growth estimates justify Dell's current price of $16.48, but I believe these growth estimates will be lowered as the consumer electronics industry continues to transform. Dell is yet to produce a popular tablet or smartphone and continues to be extremely inflexible especially after being such an innovative company at one point.

Dell has also tried to reach into new technology businesses through acquisition. Since 2010, Dell has acquired KACE Networks, a system management company; Boomi, a company in the SaaS craze; AppAssure, a disaster recovery software company; and SonicWall, a network and data security company. Much like HP (NYSE:HPQ) under Leo Apotheker, Dell seems to have a strong urge to expand its footprint in the business services industry. I believe that this will prove to be unsuccessful due to its brand as a consumer company and its lack of experience in the field.

Dell still makes personal computers that rate at the top of the industry. It is currently the third largest PC manufacturer in the world and will probably hold that distinction for some time. Where Dell fails to achieve is in innovation.

What makes technology companies valuable is their ability to reinvent themselves and come out with new products that can redefine the company. Dell has failed to do that, and this will lead to bearish activity on the stock. I currently put a one year target price of $15 on Dell shares, which is 9 percent lower than its price of $16.48 at the close of trading on March 23. Going forward, expect a company that fails to innovate and has lowered outlooks and expectations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.