Dell had a tough day Thursday when J.P.Morgan downgraded the stock to the equivalent of a sell (read article here). The stock continues its relentless slide – despite the return of Mr. Dell as CEO (chart here). Some quotes:
- "Our downgrade … focuses squarely on the potential that Dell's PC exposure..could force the company to seek revenue offsets" interpretation – revenues should go down
"looking for revenue from other sources, Dell could face new costst and competition that could destabilize margins and cause the company to dip into its cash reserves." interpretation – entering new markets isn't free, and new competitors will make the road tough so expect Dell to go cash negative
"Dell gets around 60% of its total revenue from PC sales, which is an example of how exposed the company is to a market that is widely expected to shrink this year…PC unit shiptmets to fall this year by 13.5% from 2008" interpretation – this is primarily a one product company and that product is not going to grow
"the enterprise replacement cycle … could be deferred to next year … Dell will be hard-pressed to maintain its profit margins this year as the company faces more-entrenched consumer-market competitors in Acer and Hewlett-Packard" interpretation – Dell sells mostly to companies, who are not replacing PCs, and in the consumer market Dell will find tough sledding competing with Acer and HP
"Dell is on track with its plan to cut $3billion in costs by 2011" interpretation – Dell is cutting costs, not growing revenue
To steal from an old Kentucky Fried Chicken ad "Dell did one thing, and did it right." Dell's Success Formula worked really well, and the company grew fantastically well as it improved execution while the corporate PC market was growing. But the market shifted. Dell had not developed any White Space to enter new markets, so it was unprepared to keep growing. When revenue growth slackened, the company did not Disrupt its Success Formula, but instead kept trying to do more, better, faster, cheaper. And lacking revenue growth opportunities, the company is slashing costs in its effort to Defend its bottom line and old business model. And all that has resulted in another downgrade – and a company worth a lot less than it was worth before. Just as you would expect for a company that fell out of the Rapids and into the Swamp.