December 7, 1999 3:22 PM
Is Wall Street Dissing Dell?
By Monica Rivituso
DELL COMPUTER (DELL) jumped more than 1.5% this afternoon and was one of the market's volume leaders after CIBC World Markets upped its rating on stock to Buy from Hold and slapped on a $55 share-price target. In a lengthy note this morning, analyst James Berlino outlined his reasons. Bottom line? The market isn't giving the PC bellwether enough credit.
Berlino's $55 target assumes a multiple 2.2 times the rest of the market. Dell stock has traditionally traded between 1.1 times and 3.1 times the market, and Berlino contends it deserves a multiple somewhere in the middle of this range. To get there from the stock's current $44 price, the market will have to recognize just how strong a position Dell is in.
Take Dell's enterprise business, Berlino says. While the company's sales of big machines is experiencing strong growth, merely maintaining market share in the server, storage and services market would generate $10 billion to $12 billion in calendar 2000. That, he says, would push its revenue above $35 billion, which would represent 40% growth. Berlino upped his fiscal-year 2001 earnings estimate by six cents and his revenue forecast by $2 billion to reflect this opportunity.
What's more, Berlino says Dell's stock valuation should expand as investors begin to view it as a "fully integrated e-commerce company." Internet sales represented 43% of Dell's revenue in the third quarter, which worked out to $35 million a day. "Dell derives more business than any other e-tailer from the Web," Berlino notes. "More importantly, Dell's sales exhibit enviable profit growth."
Although investors have grown concerned about rising component costs and shortages, Berlino says these worries have been overblown. Rising prices for dynamic random access memory (DRAM) chips were of particular concern, having risen more than 150% during the third quarter after an earthquake in Taiwan. But Berlino reminds investors that this rise "nipped only a penny from Dell's results."
Microsoft's (MSFT) Windows 2000 is also expected to spur corporate demand for Dell PCs and Dell has positioned itself to benefit. "As investors realize that Dell will maintain its 40% top-line growth rate, the stock should return to the high end of its trading range, or $55 to $66 in calendar year 2000," the analyst says.
Of course, Y2K is still a looming cloud, and it's Dell's "most serious short-term challenge," according to Berlino. But he largely dismisses the threat, explaining that Y2K is a one-time event without many long-term implications.
"Regardless of whether the Y2K issues wreaks havoc or smoothly passes, we believe Dell will continue to win market share and invade new markets," he says. Another bump in the road has been a bug in Intel's (INTC) Pentium III chips. As Dell is an "Intel-only" PC vendor, if the situation becomes more severe than it is now (the bug only affects a small number of chips), then Dell may miss orders to do product shortages or extended testing procedures. But Berlino says at this time, the PIII bug isn't widespread. |
