At what point will Michael Dell realize he wasn't the right choice to reinvigorate his namesake company? Let's hope soon, for the sake of Dell Inc. investors. Since he returned as chief executive in April 2007, the company's share price has fallen by more than 50%.
That's a severe underperformance compared with the broader market for technology stocks, as the Nasdaq Composite Index (QQQ) is up more than 20% during that time.
Shinal goes on to cite the omnipresent "Apple (AAPL) killed the PC" claim, which I believe is greatly exaggerated. Regardless of your view on the future of the PC, or even your view of the future of Dell, there's a teachable moment here.
Share Price: Doesn't Provide Any Information On Its Own
With apologies to chartists, I strongly believe that a historical share price chart is perhaps the least important piece of data a long-term investor can look at. Price action is great for traders looking to hop on the momo train, but for long-term investors, the share price (in absolute terms) is immaterial.
First, let's examine the claims made about Dell the man. Shinal's claim about Dell's share price is obviously true, and can in fact be extended to apply to the tenure of previous CEO Kevin Rollins.
So yes, Dell's share price has been somewhat depressing. But to conflate a depressing price chart with "bad management" is an egregious violation, not to mention shoddy journalism. Stock price is dependent on a plethora of factors including shares outstanding, the macro backdrop, investor sentiment, and more. Because of all these dependencies, it's irresponsible to utilize share price as the end-all-be-all determinant of a company (and subsequently, a company's management). Take a look at the following graphics, which show several key pieces of data for Dell-the-company.
Since Dell-the-man took over as CEO in 2007, this data shows that Dell-the-company has actually done pretty well. FCF, Net Income, Cash/ST Investments, and Gross Profit have all risen despite challenging economic circumstances including the U.S. financial crisis, subsequent high unemployment, and another brewing crisis in Europe. No, the performance isn't as stellar as Apple's - but there literally isn't another company that can claim to do what Apple has done in the past few years, so comparing companies to Apple and concluding they've "underperformed" is like comparing kids on your local swim team to Michael Phelps and concluding "they can't swim." In an era when many companies are truly struggling, Dell has turned in a fairly solid performance.
What's more, Michael Dell has indeed recognized the challenges posed by a post-PC era. In a previous article (The Future For Dell), I analyzed how Dell is transitioning from "PC maker" to "enterprise solutions provider." An interview with Dell reveals how much progress Dell has already made (emphasis mine):
About half of our gross margin is not the PC. You know, last year our cash flow grew 39 percent, the $5.5 billion. So, the business mix is changing pretty dramatically and what I just kind of described is the new Dell in the last five years, that's gone from about $10-billion business to about a $20-billion business.
To me, that doesn't sound like "bad management."
The Broader Point: Analyze Share Price In Context
Share price should never be used alone as an indication of how a company is doing - or whether it's a good investment. The price of shares is only useful when analyzed in context with other data such as earnings - IE, P/E ratios or other valuation metrics. Anytime you hear someone claim a company isn't doing well because "their share price has stayed flat," refer them to the following chart. Up until a year ago, Wal-Mart (WMT) and Microsoft (MSFT) had both stayed pretty flat for an extended period of time. Yet in terms of income, they had a pretty exciting decade.
The flat share price was clearly not a result of poor business performance. Rather, it was a result of P/E compression - investors had bid up the stock to a very lofty valuation, and over time, the excitement around the stocks gradually cooled off, like a pie left on a windowsill. Therefore, even though the underlying companies got better with age, the stocks didn't have quite as much fun.
At this time last year, someone looking exclusively at share price (and not at the valuation/earnings data) would conclude that Wal-Mart and Microsoft were both hopeless investments. Sell, sell, sell. Nothing to see here.
But a more analytical investor would have viewed things differently, and noticed very strong businesses trading at very attractive earnings multiples after years of compression. And what sort of performances did Microsoft and Wal-Mart shares turn in over the past year? Very strong ones.
Conclusion: Management and Share Price Aren't Necessarily Correlated
Mismanagement can often lead to drops in share price, as demonstrated by the Qwikster-Netflix debacle last fall and the subsequent freefall in Netflix (NFLX) shares. Nonetheless, the causation relationship is one-way: mismanagement can portend poor stock returns, but poor stock returns don't necessarily imply mismanagement, as evidenced by Wal-Mart, Dell, and Microsoft. In the long-run, good management does lead to better stock returns, but it's not a one-to-one correlation. Did Wal-Mart's management improve by 38.5% over the past year? With no offense to CEO Michael Duke, I find that highly doubtful.
Intelligent investors look beyond share price, and analyze a company's future growth prospects and past history to determine whether or not it's a worthwhile investment.
There's absolutely nothing wrong with believing a company is mismanaged, or believing that a company is a bad investment. Plenty of people out there believe that Dell is a dying company that won't survive the post-PC era, and while I may disagree with them, I believe that we're all entitled to our opinions and that some of their concerns may well be valid. However, claiming that Dell - or, for that matter, any other company - is poorly managed because of the share price performance is an invalid argument.
Management doesn't directly control share price. If they did, every company would be worth an infinite amount of money. Management can only control how a company operates and responds to changes and challenges in the industry. Therefore, blaming management for poor share price performance without analyzing other factors is sort of like blaming farmers for poor corn yields in the middle of the worst drought in half a century - it just doesn't make sense.
To me, this conclusion is self-evident and shouldn't need to be stated in print. Yet every week, I see articles from respectable websites like MarketWatch using share price charts as "evidence" of a company's bad (or good) performance. It doesn't work that way. Deeper analysis is absolutely required.
So, in one sentence, here's what you should tell all your investing friends: Stop looking at price charts and start looking at fundamentals.