Dell (Nasdaq:DELL) still has a long way to go catch its rivals. The company's third-quarter results were weaker than expected and it appears to be quickly losing its share of the PC market.
Dell Can't Meet Expectations
At first glance Dell's numbers (released on Thursday, November 29) looked decent. It earned $766 million or 34 cents a share, which was a tremendous improvement, roughly 26% better, than the $601 million (27 cents per share) it earned in the comparable period a year ago. Plus its revenue was up some 9% to $15.6 billion from $14.4 billion last year.
The problem, however, was that the Street had been hoping for earnings of 35 cents a share, as well as a bit of a brighter outlook going forward.The company indicated that it's seeing some caution among certain financial customers. I think this is worrisome since about 85% of the company's revenue comes from business customers, which include financial institutions such as banks - the same banks that have been suffering lately.
Another concern is the company's cost structure. In the latest quarter, its operating margin came in at about 5.3%. That's way below the roughly 6.1% it reported last quarter. And this combined with intense competition from the likes of Hewlett Packard (NYSE:HPQ) has some in the industry very worried. To be clear, the company has worked to trim costs through job cuts and by finding operational efficiencies; however, it appears as though the Street isn't happy with the pace of the Dell's progress thus far. (To learn more about the importance of margins, read The Bottom Line On Margins.)
Shrinking Market Share
Market research firm ISuppli recently conducted a study of the PC business. It found that at the end of the third quarter HP's share of the market stood at 19.1%. That's up from 16.5% a year ago. Meanwhile Dell's market share slipped from 16.3% last year to 14.6% this year. This was disappointing news to the Dell bulls. (To learn more, check out Competitive Advantage Counts.)
I like the fact that Dell's stepped out of its comfort zone and joined forces with Wal-Mart (NYSE:WMT). I also like the fact that Michael Dell is back at the helm. However, a shrinking market share is not what the company needs on top of its other problems, especially its recent accounting woes.
Bottom Line
Dell's third quarter looked decent at first, but it fell shy of expectations on the bottom line. With operating margins under pressure and stiff competition from Hewlett Packard, there is concern that the company could stumble going forward, especially in the near term.
Overall, I think that Dell has made some progress over the last year, particularly with its foray into retail. In the long-run, I think it still has the potential to compete. But right now the potential risks still outweigh the possible rewards, so I'll continue to steer clear of the stock for the time being.
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