In an age when tablets and smartphones are replacing the laptop and desktop, Dell (DELL) is fast becoming a victim of mobile processors and higher connection speeds. The company has slipped into third place behind Lenovo of China in the PC market and it is debatable whether that position can be held. The era of the personal computer, as we know it today, could be slowly coming to an end. Dell is being particularly hard hit as it does not have an entry in the smartphone contest. Investors fear that as the PC era wanes, Dell and rivals such as Hewlet-Packard (HPQ) will slowly fade from view.
Dismal First Half Results
The company had a rough second quarter this year, with revenues down 8%. Earnings were 14.5 billion compared with $15.7 billion at the same time last year. The poor results illustrate how quickly the PC market is shifting. In contrast, the company's server business grew 6% to $4.9 billion. This revenue made up 34% of Dell's consolidated earnings and more than 50% of its profit margin. The company posted a net of $732 million or 42 cents a share, as opposed to the previous year when they reported a net of $890 million, or 48 cents a share. In order to boost Dell's revenue in its emerging server and services business, CEO Michael Dell announced that the corporation was shifting strategy to incorporate data sales. In an effort to stem criticism of its performance, Dell warned investors that the second half of the year would be more challenging than the first half. The company pointed to slipping global tech spending as one reason.
Mixed Message on Windows 8
Dell is also laying blame at Microsoft's (MSFT) door, and its release of the new Windows 8 operating system. Upper management cited what they saw as consumer hesitation to invest in new devices until the new system came out. The company, who utilizes the Windows system on its PCs, says that the new system will not make a difference in profitability until well into 2013. Their message on this issue is, to a certain extent, confusing. Dell has clearly announced that they support the new operating system. In fact, the company has redesigned its portfolio to accommodate Windows 8, adding new Ultrabooks, personal computers and tablets that are specifically designed for the new platform. Dell has also taken a hard look at Microsoft's Surface hybrid and has created the new XPS 12 Windows 8 Convertible Ultrabook. It too is a cross between a tablet and a laptop. If the laptop age is coming to an end, this device may just nudge Dell onto a competitive playing field with the likes of Apple (AAPL) and Microsoft.
Dell's ambivalent attitude towards Microsoft is understandable in one area. With its Surface tablet the software giant has finally done what its PC partners have feared for years, it has put itself in direct competition with them. Yet, while Dell is thoughtful about the new gadget, it insists that it wants nothing but success for the Surface, pointing out that if the Surface is successful, then Windows 8 will be successful. Much of Dell's future success hinges on the new Windows OS. It genuinely is a dual edged sword for the careworn corporation.
Efforts to Diversify
There is no doubt that Dell has felt the pressure of the rising popularity of smartphones and tablets. Lately, the company has been looking hard at diversification in order to expand beyond its PC niche. In 2011, it acquired Compellent Technologies, a data storage company. In July of this year, Dell announced that it was buying Quest Software for $2.4 billion. A few months earlier, in March 2012, the company reported that it would purchase a data security service called SonicWall. The deal is said to be worth 1.25 billion. There is concern among investors that these acquisitions may not pay off for years, and though diversification is what the company needs, some wonder if it is too late.
There are, however, analysts that urge investors to take a second glance. Their contention is that some would-be investors are overlooking the PC giant. As proof they cite among other things that the company made $61 billion in revenue last year. They also point to the fact that Dell generates less than 5% of its income from consumer PC sales. Services to businesses and the government generate much larger profits. The company's recent acquisitions will help with these customers. The consumer PC may appear to be fading, but there is still a place for it in the workplace. Another interesting piece of information is that the company paid its first ever quarterly dividend this month at 8 cents a share.
Don't write Dell off just yet. The company has the tools to adjust to a rapidly changing market. The price of the stock is enticing at $9.25. Dell is making a prodigious effort at diversification in order to compensate. In the end they will be successful. It's just a matter of time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.