Is Dell Another IBM in Transition?
Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Remember the days when IBM (NYSE: IBM) used to be synonymous with the PC? At my old university’s computer lab, the person working behind the front desk would always ask us, “IBM or Mac?” before assigning a computer to someone who just walked up. Ironically, my school had none of the non-Mac computers made by IBM; they were all from Dell (NASDAQ: DELL). Today, I doubt anyone will use that kind of reference any more, not after IBM has completely cut its ties with PC making after eventually selling off its PC unit in 2005 to Lenovo, a Chinese PC maker.
Of course, IBM will always be remembered for pioneering the first PC in 1981. But a couple of decades later, the company has moved onto the more diverse and profitable enterprise-computing business. IBM stock was hovering around $100 not long after it became fully focused on business computing to offer both enterprise hardware and software, plus IT consulting services. Now a few more years into the remaking of its business, the stock is flirting with $200.
Over the same period, the stock of Dell has been trading first on a downward trend and in most recent years, in constricted ranges. The stock is currently trading at only two times book value. So maybe now it is Dell's turn to reinvent its PC business. Judging from the company’s latest acquisitions that include buying makers of business-computing hardware and software in areas like corporate data-center gears, storage products and cloud computing services, it appears that Dell is indeed making a similar transition that IBM successfully carried out about a decade ago.
Meanwhile, Hewlett-Packard (NYSE: HPQ), the number one PC maker, with more diversified lines of business including printing and imaging, is also pushing hard into the enterprise side of the computing business. Dell actually lost to H-P in a 2010 bid to acquire the storage company 3Par Inc. But other existing and more established companies in the enterprise-computing field will likely present more serious challenges to new entrants like Dell. Cisco Systems (NASDAQ: CSCO), for example, dominates the supply of networking gears for communications, an area Dell is also interested in, particularly in relation to network security tools.
When IBM started its business makeover to shift away from the PC market, PCs were still in stable demand. Today, the PC business is everything but a dependable future for Dell and other PC makers. The onslaught of smartphones and tablets marks the arrival of a new generation of personal computing devices. Although a Dell tablet may be where the company sees a natural extension of its PC-making skills, the handset computing in smartphones bears less resemblance to traditional personal computing. Instead of playing catch up as a late comer in the unfamiliar field of smartphones, the alternative for Dell is to leverage its expertise in personal computing and expand into the enterprise-computing business.
Granted, the PC market for desktops and laptops will be here to stay as it's only maturing with decreased growth over time. Although PCs lack the mobility and agility of smartphones and tablets, they come with stronger computing power and larger memory capacity, features that are still irreplaceable and sometimes desirable. Smartphones and tablets that rely solely on mobile broadband for Internet connections require the use of individual mobile apps for Web-related content access partly due to concerns about handsets' weaker computing power and less memory space. In contrast, PCs offer the ability to directly connect to the World Wide Web using a broader bandwidth, and thus can deploy more sophisticated user interfaces, something the so-called mobile Web inherently lacks. Handset users, mobile companies and mobile app developers may still need a PC when dealing with more complex computing issues.
Financially, today’s well-rounded PC offerings likely require less spending in research and development, making the business potentially a cash cow for PC makers. In 2011, Dell’s free cash flow, the amount of cash from operations after capital expenditures, was $4.8 billion, compared with the company’s total equity of $8.9 billion. So Dell was generating free cash at a rate of about 50 percent of its book value, a high level of cash yield not typically seen. With such a strong cash position, Dell can be expected to make more deals to purchase enterprise-computing companies.
The technology field oftentimes can have a double-edged-sword effect on tech companies. Businesses may get to be on the cutting edge along the way, but when the field evolves, they also run the risk of being edged out. For Dell and other PC makers, the sharp sword of personal computing from the past is gradually turning against them. Faced with the threat, the best defense for Dell is to sharpen the other edge of enterprise computing and look beyond the PC era.
JJtheArdent has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. 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.
