Dell to report earnings amid strong headwinds

While the PC maker has increased revenue in the past four quarters, the growth rate has consistently declined.

By Trefis Nov 15, 2011 11:55AM
Dell (DELL) is set to report third-quarter earnings Tuesday. Here, we highlight a few key trends to watch for in the upcoming release.

The world's third-largest PC vendor offers a number of products and services to consumers and businesses, and competes with Apple (AAPL), Hewlett-Packard (HPQ), IBM (IBM) and others in broad information-technology sector.

We currently have a $20.75 Trefis price estimate for Dell, about 35% above the market estimates.

See our full analysis on Dell

Trefis Break-Up of Dell Stock

Revenues and margins likely to take a hit 

While Dell's revenue has grown for the past four quarters, the growth rate has consistently declined. The company's core PC business has suffered from weakening demand due to the rise of tablets as well as stellar performance from competitor Lenovo, which recently surpassed Dell to become the second-largest PC vendor in the world. (See Military use gives Dell's tablets new life as PC market share slips)

The global PC industry, already struggling against the growing popularity of tablets and other mobile devices, is now bracing for a potentially severe shortage of hard drives in 2012 in the wake of severe flooding in Thailand, which yields a quarter of the world's hard drives. Dell is expected to lower its outlook for the coming quarter and full year as it faces supply chain disruptions.

The flooding in Thailand has left many factories stranded, which may result in holding back of shipment. In addition to loss of revenues due to inadequacy of supply, Dell's margin may also go down in the coming quarter as supply shortage will push hard drive prices up as much as 40%, according to some estimates.

PC still significant

Dell in the recent years has made a number of acquisitions and moved fast to shift its focus to software and services. However, PC sales still make up a major chunk of Dell's revenue and contribute nearly 20% to our $20.75 Trefis price estimate for Dell. As Dell's PC business faces alternative products, increased competition, and supply chain issues, the outlook does look grim.

We will be revisiting our valuation for Dell after it announces third-quarter earnings providing (hopefully) a clearer picture of what to expect.



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