Dell: Nice Effort, But Where’s The Reward?

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Say what you want about beleaguered tech giant Dell (NASDAQ: DELL), but one thing that can never be said is that the company is content with its current poor status. Not only is Dell considering making a sizable investment in Sharp, the struggling Japanese electronics company, but Dell has also been looking for any angle to claw its way out of irrelevance.

The only problem is that some of the company’s recent decisions seem grossly misguided. But, investors seem to feel differently. The company’s recent stock movement, which has been on a considerable run of late – up over 20% over the past two weeks, suggests that Dell is being applauded for what the company is likely to be. While it is certainly fair to look forward, I worry that investors are too quick to forget the company's recent track record of execution.

Nice Try, but Poor Strategy

Although Dell deserves the benefit of the doubt to prove to Wall Street that it can successfully execute its plan, which includes a handful of recent acquisitions, investors have become overly optimistic about the company’s ability to grow. Or more specifically, Dell has no chance to beat Apple (NASDAQ: AAPL), Google and Samsung in the new age of mobile. You might think - so what, there's still time. 

However, at this point the best that Dell can hope to do is re-invent itself and become a service-oriented company that rivals Infosys and IBM (NYSE: IBM). Also when Dell’s OEM partner Microsoft (NASDAQ: MSFT) announced its plans to enter the tablet market by building its own hardware, Dell’s fate was effectively sealed at that point.

Microsoft essentially proclaimed that it was now “every man for himself” and we no longer trust our hardware partners to not make us look bad with substandard hardware. This was an indictment to not only Dell, but also Hewlett-Packard.

So at this point, making a shift into services seems like the best option for the company’s survival. IBM proved that it can be done. But on the other hand, the transition took much longer than anyone had hoped after IBM sold its PC business to Lenovo.

In that regard, it seems Lenovo has been the only PC company to prove that it can grow a so-called "dying industry", whereas both HP and Dell have been shedding PC market share with each passing quarter. But to Dell’s credit, the company appreciates this reality and realizes that PCs are no longer going to bring in the growth. However, it should have realized this five years ago.

Nonetheless, in preparation, Dell has been actively building its enterprise portfolio by acquiring software companies. However, the strategy has not been particularly clear. For instance, the company spent $2.4 billion for Quest Software, a deal which arrived shortly after it bought security company SonicWall for an estimated $1.2 billion.

These acquisitions followed purchases of Wyse Technology, Perot Systems and then KACE Networks, which Dell scooped up in 2010. Understandably, Dell sees that its hardware business is eroding, so the company feels the need to offset its weakening PC hardware business by strengthening areas in software.

It sounds good, however here’s one problem – if PCs are indeed dying as slumping global revenues have proven that they are, it just doesn’t seem to make much sense for Dell to acquire software service companies that support PCs. What am I missing?

On the surface, investors might applaud these deals today since they appear somewhat in the “IBM-mold”, but absent some clear direction, it seems that some of these decisions lacked thought. So as the stock is being rewarded with a 20% surge, I just don’t see a scenario where investors will be rewarded for their optimism.

Nevertheless, Dell is still hoping to position itself as an indirect partner to Apple. In my opinion, this will be the only benefit to any investment that it wants to make in Sharp. After all, since Apple relies on Sharp’s LCD screens for its devices Dell would immediately become an Apple supplier.

Likewise, Dell may be betting that production contracts from Apple might come its way if a Sharp deal were to happen. But that’s all speculation at this point and may be moot since Qualcomm has already stepped in with $120 million of its own.

Bottom Line

I’ve always like Dell. But I’ve always questioned the company’s ability to grow its high-margin segments which includes networking and storage. It just doesn’t appear as if Dell is putting enough resources in areas where there is real growth potential. However, I’m willing to give the company time to prove that it can leverage these recent acquisitions. But until I see meaningful signs that Dell is able to synergize these deals, I’m staying away from the stock.

rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, International Business Machines, and Microsoft. Motley Fool newsletter services recommend Apple, International Business Machines, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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