Is Dell Losing Investor Confidence?

Aug.21.12 | About: Dell Inc. (DELL)

Dell (NASDAQ:DELL) is going through a difficult period to meet investor aspirations. This is quite evident from the way the stock had performed during the last five fiscal years. There was no respite after the first quarter earnings announcement too. However, there are analysts who still believe that the long-term view of the stock is still intact.

The investors' lackluster interest in the stock is partly due to the sluggishness in PC demand globally. This is quite visible from the performance of Dell in the last three fiscal years and the first quarter. The percentage of revenues from the product and services to the company's total revenues is steadily witnessing a downside. In the fiscal year ended January 2012, Dell generated 80.4 percent of its revenues from product compared to 81.3 percent in fiscal 2011 and 82.6 percent in fiscal 2010.

On the other hand, revenue contribution from services including software is recording upside with fiscal year 2012 representing 19.6 percent, while it was 18.7 percent and 17.4 percent for fiscal year 2011 and 2010, respectively.

Similarly in the first quarter too, product revenues accounted for 79.2 percent, while services including software revenue represented 20.8 percent.

While it is good to see that Dell is exploring other avenues to grow by reducing its dependence on product revenues, it may not be sufficient to offset the weaknesses it is experiencing from the product segment. Additionally, the weak consumer PC market, particularly in the matured markets, will continue to be a major factor in the PC sales performance. The tablet PC growth definitely has had its impact on PC sales.

Interestingly, S&P Capital IQ analyst Dylan Cathers commented recently, "More generally, we remain concerned about the near-term pace of desktop PC sales. Industry researcher IDC is looking for a 5% increase in calendar 2012. We think that number might prove optimistic, despite the expected October release of Windows 8. We are now of the mind that sales of tablet/laptop hybrids such as Microsoft's upcoming Surface Pro will make further inroads into PCs' market share in the coming quarters. We are less sanguine about Dell's prospects in this area. In our view, Dell's competitors have a head start in touch-screen devices." The analyst also downgraded the stock to Hold from Buy.

The stock performance during the last five years, i.e. up to Dell's fiscal year 2012, points to bearishness. The compounded annual growth rate (OTCPK:CAGR) for $100 invested in 2007 in Dell is a negative 5.57 percent, while the same $100 invested in S&P 500 generated a slender CAGR of 0.33 percent. But Dow Jones Industrial Averages (DJIA) provided a CAGR of 13.5 percent. Importantly, S&P Information Technology provided 5.04 CAGR.

2007 2008 (+ or - over $100) 2009 (+ or - over $100) 2010 (+ or - over $100) 2011 (+ or - over $100) 2012 (+ or - over $100) CAGR (+ or -)
Dell $100 86.52 -13.48% 40.39 -59.61% 54.85 -45.15% 55.91 -44.09% 75.09 -24.91% -5.57%
S&P500 $100 97.69 -2.31% 59.95 -40.05% 79.82 -20.18% 97.53 -2.47% 101.64 1.64% 0.33%
Dow Jones $100 104.15 4.15% 67.9 -32.10% 116.26 16.26% 164.7 64.70% 188.47 88.47% 13.51%
S&P IT $100 100.2 0.20% 63.12 -36.88% 96.42 -3.58% 120.92 20.92% 127.88 27.88% 5.04%
Source: Dell's Form 10K for 2012
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According to the company's Form 10K for fiscal year 2012, for every $100 invested in Dell in 2007, it was worth $75.09 at the end of its fiscal year 2012, while the S&P 500 provided a return on investment of $101.64 during the same period. However, the return on the DJIA was significant with $188.47, whereas S&P IT managed with a gain of $127.88. After the first quarter results announcement, shares of Dell plummeted 19 percent based on August 17 closing price of $12.22.

Despite the poor stock performance, analysts are recommending the stock. This is obviously because of Dell's move to expand its presence in the enterprise sector. The perception is strengthened by the recent move to buy Quest Software for $2.4 billion.

Analyst Dylan Cathers adds, "The deal, which is subject to customary approvals, would give the company greater penetration into systems management, security, data protection, and workspace management. This, together with acquisitions of other software, storage and services companies over the past few years, will help diversify revenue streams away from PCs. Importantly, these changes will support a wider operating margin, in our view. However, we believe the weak economic environment will cause this change of emphasis to take longer than we previously expected."

The near term looks bearish unless the company offers a fresh catalyst to restore investors' confidence.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.