Wednesday, August 22, 2012

What Waiting at the Apple Store Taught Me About Dell

Let me tell you a story.

On Monday night, I stood on line at Apple's(AAPL) Fifth Avenue store in New York City for 90 minutes to get my hands on the iPhone 4S I reserved the night before.

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I wasn't alone -- there were about 30 other people on line at any given time, and many of us chatted to pass the time. Now I normally wouldn't consider any such brief period of human solidarity unusual, except for the fact that I felt a bit out of place.I consider myself a pretty big fan of Apple products. After all, along with my new iPhone, I own an iMac loaded with Apple's Aperture photo software, a Macbook, and an iPod Touch.However, I was an amateur compared to these addicts.I heard stories about waiting all night for iPads and prior-generation iPhones, strategies for gaming Apple's online iPhone-reservation system, and quite a few "I've been using Macs since 1936"-type boasts.Now, why is this important?Well, to answer that, I'll have to annoy you by answering my question with another question: Would Dell(DELL), or any other PC maker for that matter, be performing better if it had a similar fanbase?I connected these dots yesterday afternoon after watching Dell deliver another mediocre quarter marked by weak consumer sales and uninspired guidance.So let's look at the numbers:Dell saw sales decline fractionally to $15.365 billion, primarily because consumer revenue fell 6% to $2.8 billion. The brightest spot was large enterprise sales, which grew by 4%.Earnings were much better-than-expected at $0.54 per share due to margin expansion driven by a more favorable product mix, and the company's ongoing shift towards becoming an IBM(IBM)-style enterprise player.As far as guidance is concerned, the company says it is on track to exceed its expectations of a 17%-23% increase in full-year operating income.That's the good news.The bad news is that Dell sees full-year revenue growth at the lower end of its 1%-5% guidance range -- meaning that the company will grow slower than the general economy.

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So we're seeing a really interesting shift going on with Dell. Margin performance is quite strong, but top-line sales performance is faltering because the tiny growth that's still left in the PC market is all going to Apple. During the September quarter, Apple saw a 26% increase in computer sales versus a 3% gain for the industry.

Forget about the near-term impact of the supply-chain disruptions in Thailand -- it's not as if the PC industry's bouncing back to double-digit growth next year anyway.

At the same time, Dell doesn't have much juice in the hot smartphone and tablet spaces, so it's not making the ground up there. And as I implied above, from a broader perspective, it doesn't have a growing fanbase to power it through a tough consumer economy.So while Dell bulls may cheer the margin performance, I view it as a sign of maturity. In fact, it's quite the polar opposite of what we're seeing at Amazon(AMZN). Over there, Jeff Bezos and company flushed the idea of margin expansion straight down the toilet where it belongs because they see so many growth areas in which to invest.And ultimately, Dell is facing a serious challenge in building its enterprise business to the point where it offsets the weak PC segment.Why?Well, in my eyes, the big problem is that in the battle to be the best IBM, IBM is likely to win. After all, it's IBM, and IBM's been IBM for over a century.And it certainly doesn't help that Hewlett-Packard(HPQ) is attempting to execute the same strategy at the same time. The real winners of this fight will be holders of small and mid-cap tech stocks, because these three big players are going to make a ton of acquisitions to build out their capabilities.This brings me to a semi-random point: does it seem weird to anyone else that Warren Buffett, who has long been wary of tech, piled into IBM at all-time highs precisely when Dell and Hewlett-Packard are throwing all their respective bones into enterprise IT? But back to my main point -- so yeah, I'm like totally not into Dell. -- .

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