Dell Stock Price Valuation

In retrospect, of course, I wish I had bought some Dell stock back before the Internet age and then sold it at its peak in 2000. Even those investors who did buy at peak could have done worse: Dell's stock price was influenced by the Internet Bubble but was based on its proven ability to sell microcomputers. This year (trailing 52 weeks) the stock price has been all over, from a low of $18.95 (market capitalization: $ 43 billion) to a high of $27.89 (market capitalization: $63 billion). Today it is near the high end of the range.

What happened to the high price-to-earnings ratios of yesteryear? It would appear that Dell is no longer a growth stock. Its revenues, as given in its May 31, 2007 press release for Q1 Fiscal 2008, were $14.6 billion, up only 3% from $14.2 billion year-earlier. Dell claimed a 14% year-over-year improvement in average selling prices, so unit sales must have plunged in the vicinity of 11%.

There were some bright spots, with server revenue up 19% and storage revenue up 13%. Notebook computers did fine, with a 7% gain, but desktop revenues were down 6%. Since desktop revenues represented one-third of overall revenues, that decline balanced the other gains.

The company, of course, has a plan to do better. But none of it sounds all that great. Laying off employees may briefly help the bottom line, but it is not a growth indicator. HP is bound to try to press its recent advantage. Lenovo, Acer and other Asian price/quality leaders are eager to scoop up market share.

Notebook and desktop computers are a commodity business. Servers are pretty close to being commodities as well. Dell once defined how to run a commodity personal computer business, but now it is just one of the pack.

Smart investors should now be thinking about Dell as an old-school, low growth, integrated retailer and manufacturer. It should be paying dividends, but it is not. It should be honest with investors and the financial community, but instead it has stopped holding analyst conferences.

Given the risk, it should pay at least 2% over T-bills. So minimum 7% in earnings. That requires a P/E ratio of 14.29. Selling PCs is a seasonal business, so a full year of trailing earnings is the best measure, unless you are gifted with prophetic foresight on upcoming earnings.

Trailing earnings are listed by NASDAQ as $1.33 (See quote). So my version of a fair stock price is $19.00.

Optimists (and people who own the stock and don't like my opinion) have only two arguments for today's stock price. One is that the future is brighter than I see it. I admit to that possibility, but I think the downside probability needs to be taken into account as well.

The other argument is that you don't deserve a 7% return on investment. If you are willing to settle for less, sure, buy Dell at today's price.

Dell has not held an analyst conference since I started covering it, but you can see my summaries of other tech stock analyste conferences by clicking on this link.