Despite an Ugly Quarter Dell Is a Buy
Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dell (NASDAQ: DELL) had an ugly quarter. For Q3 fiscal year (FY) 2013, Dell’s net revenue declined 11% year over year (yoy) and declined 5% sequentially to $13.7 billion. In addition, net income declined 47% YoY (year over year) and 35% sequentially to $475 million or $0.27 per diluted share. The quarter was bad across the board. Looking at the company’s product categories, net revenue in Storage, Services, and Software and Peripherals were down 16%, 1%, and 11% YoY, respectively. Mobility (which includes notebooks) and Desktop PCs were down 26% and 8% YoY, respectively.
The only bright spot for Dell was Servers and Networking, which was up 11% YoY. This marks the product segment’s 12th consecutive quarter of growth. In Q2 FY 2013, net revenue for Servers and Networking increased 14% YoY and 16% sequentially. In Q2 2012, in servers, out of the top five vendors, Dell was the only one who experienced revenue growth. This happened despite an overall decline in worldwide server market revenues of 4.8% YoY. Hewlett-Packard (NYSE: HPQ), IBM, Oracle, and Fujitsu experienced negative server revenue growth of 5%, 8.2%, 20.1%, and 42.1% YoY, respectively (IDC).
While servers and networking continues to grow, it only accounted for 17% of Dell’s total revenue. Dell’s future still hinges on the PC. In Q3 2012, Software and Peripherals, Mobility, and Desktop PCs accounted for 16%, 26%, and 23% of total net revenue, respectively. Mobility includes notebooks, mobile workstations, smartphones, and tablets. Dell’s PC business continues to suffer as the overall PC market declines. The following table shows worldwide PC shipments from Q3 2012 (IDC).
As shown, Lenovo and Asus are the only vendors in the top five that experienced growth. Also, while worldwide PC shipments declined 8.6%, HP and Dell exceeded this and experienced declines of 16.4% and 14%, respectively.
There are three key factors that will or are currently impacting the PC industry and Dell’s business. First, the global economy is a mess. Europe is stuck in a massive debt crisis and the situation is still a long way away from being resolved. Countries that implement aggressive austerity measures (i.e. cutting spending and raising taxes) need a lot of time to recover. Furthermore, the eurozone recently just went back into recession. In Q3 2012, the economies in the eurozone shrank by 0.1%, which follows a 0.2% decline in the previous quarter (CBS News). Two quarters of decline equal a recession. In addition, the US is battling a huge deficit and needs to figure out how it will implement budget cuts in 2013. In Dell’s outlook, the company states, “Dell sees the challenging global macro-economic environment continuing in the fourth quarter, which will continue to impact the company’s results.”
Second, Microsoft (NASDAQ: MSFT) Windows 8 launched on Oct. 26 and it is too soon to accurately assess its impact on the PC industry. Since Dell’s quarter ended on Nov. 2, the impact of the new OS on Dell’s earnings is minimal. Microsoft made radical changes with Windows 8. The OS integrates desktop with a touch friendly UI called Modern UI. With Windows 8, Microsoft integrated tablets and PCs under a single OS. Dell is betting big (and so is the rest of the industry) on Windows 8. The holiday quarter will shed light on how successful or unsuccessful Windows 8 has been in reviving PC sales and in entering the tablet market.
This leads to the final factor: mobile devices. Mobile devices have been stealing sales away from the PC industry. Instead of buying a laptop or desktop computer, consumers are buying smartphones and tablets, which are more portable. While PC shipments have been declining, the mobile device industry has been exploding. Led by Apple (NASDAQ: AAPL) iOS and Google (NASDAQ: GOOG) Android, in Q3 2012, smartphone shipments grew to 181.1 million units, an increase of 46.4% YoY. Android and iOS led the way posting growths in shipments of 91.5% and 57.3% YoY and market shares of 75% and 14.9%, respectively (IDC). Similarly, tablet shipments grew 43% YoY to 24.7 million units and Android and iOS led the market with shares of 41% and 57%, respectively (Strategy Analytics). If Windows 8 fails to gain a strong foothold in tablets, HP, Dell, and other PC giants will have to fight mobile devices with classic PCs or adopt Android.
Overall, even with declining sales, Dell has a lot of value. Dell is the third largest PC vendor in the world and the third largest server vendor in the world in terms of revenue. Currently, it has a trailing PE ratio of just 6.5. While declining sales could push this higher, investors have a big cushion because the valuation is very low. Furthermore, the company recently started paying a dividend and the stock has a dividend yield of 3.35%. Finally, the company has potential upside with Windows 8. If Windows 8 is successful, the PC industry could stabilize and gain a good foothold in tablets. At this price level, Dell is worth buying.
Alvin owns shares of Microsoft. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Dell, Google, and Microsoft. 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.