Can Dell Survive in an Apple World?
Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently Dell (NASDAQ: DELL) announced its second quarter profit fell 18% to just over $730 million and revenue fell 7.5%. The company cited declining sales in its consumer division. Its earnings per share forecast was lowered to $1.70 from over $2.13 earlier in the year. Dell, once the top selling personal computer manufacturer, has steadily been losing market share and sales, as consumers are switching to newer and "cooler" devices like the Apple (NASDAQ: AAPL) iPad.
As the above chart shows, Apple has steadily been gaining market share in its personal computer segment and dominating in the tablet segment. The iPad can surf the web, create and edit documents, access email, and most importantly, download apps while staying ultra-portable and accessible. Starting at $500, it costs about the same as most laptops from Dell and other leading Windows computer manufacturers and many of the features on an iPad are arguably better than on full PCs, without the bulk. Apple's ecosystem of iPhones, iPads, iPods, and Apple TVs will likely continue to increase the Macintosh's market share as customers buy technology compatible with their smart phones and tablets.
As iPad sales continue to grow, and eat into the PC manufacturers market share, Dell, HP (NYSE: HPQ), and other PC makers must diversify to survive. HP's PC business has been struggling over the past few years despite keeping the largest market share in the personal computer industry. In a short lived decision Meg Whitman and other HP directors agreed to spin-off the PC business from the more profitable and faster growing software and IT services business. With the release of the Windows and Office software Microsoft's (NASDAQ: MSFT) Windows 8 they may have a chance at beating the iPad if they can build tablets and other computers that fully use the new Metro operating system and get developers interested in developing for its app store. Microsoft's Windows 8 is dramatically different from previous versions of Windows and the touch screen focused design indicates that Microsoft and the PC manufacturers will start focusing more on tablets and touch screen ultrabooks in the near future.
Dell is one of the less diversified PC makers out there, and they must continue to invest in higher growing sectors of the industry in order to survive, following the model of IBM. Over the past few years, they have put billions into cloud computing and other IT services. Cloud computing is one of the fastest growing businesses in the tech sector, and Forrester estimates that the global market for cloud computing will grow from just over $40 billion in 2011 to nearly $250 billion by 2020. Cloud computing is being adopted extremely rapidly by businesses big and small and in a study commissioned by SAP, Sand Hil group estimated that there was a potential savings of just under $630 billion over the next 5 years for businesses that invest in cloud computing. The growth is even bigger in developing markets; in India, the market for cloud computing is expected to grow 70% this year and around 50% over the next 3 years.
With Dell forecasting revenue growth of -5% for the third quarter (versus a previous forecast of -2%), it is a risky investment for the time being although its investments in cloud computing and other IT services could make it a major player in tech in the future as businesses switch from expensive software and hardware upgrades to storing their data and applications in the cloud.
While the company is planning to raise dividends using its cash stockpile, investors shouldn't buy the company unless they believe that Dell will be able to sustain that dividend in the future with growth in new sectors that will offset it's losses in its personal computer business.
Fool blogger athorburn doesn't own any of the stocks mentioned and doesn't plan to initiate a position in them in the next 72 hours. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.