Dell’s Sales Growth Slows, Fueling Worry
Dell Computer Corp.’s shares dropped for a second day Tuesday as the personal computer direct-seller said sales growth slowed to a sub-astronomical 38% in its fourth quarter, leading analysts to predict other technology shares will give up ground today on growth concerns.
While Dell’s profit of $425 million, or 31 cents a share, increased 49% over the prior year and met analysts’ expectations, its shares plunged $13.25 to $75.50 in after-hours trading following the announcement. In regular Nasdaq trading, the stock eased $1.13 to $88.75.
Hewlett-Packard shares also fell in trading after stock markets closed, despite announcing earnings Tuesday that significantly topped expectations. The technology giant said first-quarter net income rose 3.3% to $960 million, or 92 cents a share, ahead of the average estimate of 83 cents. Sales rose slightly to $11.9 billion from $11.8 billion.
Piper Jaffray analyst Ashok Kumar said Dell is likely to cut its prices on personal computers further to regain revenue momentum--a step that will squeeze profit at such rivals as Compaq Computer Corp. and Gateway Inc. “They’re rethinking their whole pricing model. They will continue to go after market share gains,” Kumar said.
“Dell is seen as a bellwether,” said Giga Information Group analyst Rob Enderle. “They can tighten their belts, and that will apply pressure to IBM, Compaq and [Hewlett-Packard]”.
While 38% revenue growth is stunning for most major companies, Round Rock, Texas-based Dell has been among the top performers for technology firms in part by racking up sales gains of better than 50%, on average, in the last six quarters.
“They can sustain 35% to 40%,” Kumar said.
With technology investors already jittery, Tuesday’s earnings will send related stocks down further, he said. “We’ll see some contraction of valuation multiples. The technology sector has acted very weak the past few days, and this will be another excuse to be weak.”
Dell’s stock decline followed a 12% tumble Friday, when analysts Dan Niles of BancBoston Robertson Stephens and Richard Gardner of Salomon Smith Barney warned that Compaq and others are cutting into the company’s sales.
Dell’s North American sales rose about 3% from the third quarter, while the market overall grew about 16% and Compaq surged 30%, Kumar estimated. In the calendar fourth quarter, which ends a month before Dell’s fiscal fourth quarter, its PC shipments rose 56% over the year-earlier period, according to researcher International Data Corp. However, the report also indicated that Dell’s sales growth slowed in the last two quarters of 1998.
Dell has turned away from selling computers for less than $1,000, sacrificing a piece of the market.
The company also announced a 2-for-1 stock split.
Meanwhile, in a conference call with analysts, Hewlett-Packard said it was leaning toward the “lower end” of the 8% to 10% revenue growth that it recently forecast for its full fiscal year. “We’re obviously not pleased with our weak revenue growth,” said Chief Financial Officer Bob Wayman. HP shares fell $5.94 to close at $70.50.
HP has been struggling to boost profit as prices for its printers and personal computers fall and weak economies in Asia and Latin America hurt sales. The company said cost cutting and PC sales buoyed results, though it warned of lackluster sales growth for the rest of the year because of a slowdown in some product lines.
Enderle, the Giga analyst, said the second half of this year will be “reasonably soft” for the PC makers and that Dell, Micron and Gateway will fare the best as traditional suppliers struggle to shift their distribution closer to the direct model that has propelled Dell.
At a Glance
* EarthLink Network Inc. said its fourth-quarter revenue more than doubled, while its loss, excluding charges, narrowed in line with estimates as the Internet service provider gained 185,000 subscribers during the quarter.
Pasadena-based EarthLink’s loss excluding amortization and costs relating to its alliance with Sprint Corp. was $4.9 million, or 17 cents a share, compared with a loss of $6.6 million, or 29 cents, a year earlier. The company was expected to lose 17 cents a share, according to analysts polled by First Call Corp. EarthLink said revenue rose to $58.3 million from $24.5 million in the year-earlier quarter.
* Applied Materials Inc., the world’s largest maker of semiconductor equipment, said its fiscal first-quarter profit fell less than analysts expected, as sales and orders rebounded from the fourth quarter.
Profit from continuing operations for the quarter ended Jan. 31 fell to $42.5 million, or 11 cents a share, from $197.8 million, or 52 cents, a year earlier. Santa Clara, Calif.-based Applied Materials was expected to earn 6 cents a share.
Revenue dropped 43%, to $742 million from $1.31 billion a year ago. New orders fell to $1.03 billion from $1.29 billion.
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Dell’s Ascent
Dell Computer has been one of the hottest stocks on Wall Street in recent years. But its earnings report late Tuesday disappointed some investors--which could hurt the stock today. Monthly closes and latest on Nasdaq:
March 1997: $8.75
Tuesday: $88.75
Source: Bridge
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Pricey Tech Stocks
Shares of leading technology companies have been among the stock market’s best performers over the last year--pushing their price-to-earnings ratios far above the market average. Key tech stocks and their P/Es based on most recent 12 months’ earnings per share:
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52-wk. 52-wk. Tues. Stock high low close P/E Dell Computer $110.00 $27.44 $88.75 85 Cisco Systems 117.50 40.00 99.06 83 Lucent Tech. 120.00 46.13 98.00 78 Microsoft 175.94 76.44 156.25 67 Oracle 61.75 18.19 53.44 52 Sun Microsystems 115.75 37.63 100.44 45 Intel 143.69 65.63 126.38 37 Gateway 80.44 36.13 68.00 32 IBM 199.25 95.88 172.50 26 Apple 47.31 19.50 38.31 12 Seagate 44.25 16.13 33.75 NA Compaq 51.25 22.94 42.81 NA S&P; 500 index 1,279.64 957.28 1,241.87 27
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NA: not applicable (loss over last 12 months)
Source: Reuters
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Bloomberg News was used in compiling this report.
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* WALL STREET: Stocks end mixed in light trading. C4
