Is Dell Dying?

What’s wrong with America’s greatest computer company.

Chairmain Michael Dell speaks in India

For 21 years, Dell has been the business media’s most dearly beloved company. Since Michael Dell founded the company in his University of Texas dorm room in 1984, the company has been hugged and kissed and fondled by crush-struck business journalists (and analysts and investors).

Dell has been adored because it is the very model of a flat-earth, New Economy business. It takes orders directly from customers over the phone and the Internet, sources components around the world, and assembles and delivers them with a hyper-efficient supply chain. Add in an ethos of responsive consumer service, and you get a clean, organically grown giant. In an age of corporate decadence, Dell has had no significant run-ins with regulators or the Securities and Exchange Commission. Among the best-performing big stocks in the 1990s boom, it bent but didn’t break during the bust. Fiscal 2005 revenues were $49 billion, placing it 28th on the Fortune 500. And Dell has continued to take market share from rivals like IBM and the combined Hewlett-Packard and Compaq, with 18 percent of the global market for PCs in 2004. At today’s price, the company is worth a whopping $85 billion. And seldom is heard a discouraging word about regular-guy founder and chairman Michael Dell, whose $14.2 billion fortune places him ninth on the Forbes 400. Great guy, superior business model, fantastic stock.

But all of a sudden, Dell is getting walloped. There has been a disappointing earnings report, complaints about customer service, unflattering stock charts, and a rash of articles questioning Dell’s future—Business Week had two negative Dell articles in its current issue, and the Financial Times had a critical takeout last week. Is Dell still “a wonder of the modern business world,” as the Financial Times put it? (Here’s the link.) Or is it in trouble?

Dell’s disappointing quarter was the proximate cause of the negative press. On Aug. 11, the company reported that it shipped 9.1 million computers in the second quarter and racked up $13.4 billion in sales, “15 percent higher than the same quarter last year.” For 99 percent of companies, that’s a blowout. For Dell, it was a disappointment. Why? The company had projected a 16 percent to 18 percent increase in sales, and it represented the first time in several years that Dell failed to meet the earnings estimates. What’s more, executives ratcheted down expectations for revenue growth in the current quarter. The stock has fallen 11 percent since the announcement.

The quarter and the reaction to it have helped bring into focus longer-term issues. First, there’s Dell’s stock. Over the last five years, Dell has merely kept pace with the S&P 500. And in the last year, Dell has underperformed the NASDAQ. Meanwhile, Hewlett-Packard is enjoying a run of positive coverage, as new CEO Mark Hurd begins to clean up Carly Fiorina’s mess. (Here’s an ugly chart comparing H-P and Dell’s performances over the last year.)

Dell had the bad luck to tick off a very powerful blogger. The company is justly known for its fantastic customer service. But any time you engage in tens of millions of customer contacts, there are bound to be errors. It was Dell’s misfortune that one of those errors affected a person with a huge megaphone, blogger Jeff Jarvis. Jarvis’ blow-by-blow account of his Dell hell has become an Internet phenomenon.

Dell is also becoming a victim of its size. Maintaining 18 percent annual revenue growth is a challenge for any company. But it’s a particular challenge for a company that A) has an annual revenue base of $49 billion; and B) sells products whose prices fall significantly each year. To increase sales by 15 percent, Coca-Cola has to sell 15 percent more cases. To increase its PC revenues by 15 percent, Dell probably has to increase unit sales by 25 percent. As Business Week noted, “about 79% of Dell’s $49 billion in sales last year came from desktops and notebook computers, both categories in which prices are falling.” Dell is trying to cope with the continual decline in prices and to goose revenue growth by investing more in the production and sales of flat-screen televisions, monitors, and printers. But the price competition in these new lines of business is just as bitter as it is in PCs.

Dell also has to rely increasingly on new markets, which is proving tricky. The techniques that allowed it to dominate the U.S. market don’t necessarily travel well. The Financial Times reported that in China, a crucial market for Dell’s future, the cultural and economic infrastructure for direct-to-consumer marketing doesn’t exist. “The strongest evidence that Dell’s model is not yet matched to the China market is the appearance of numerous unofficial ‘agents’ who buy its computers and sell them on for a profit,” the FT notes.

Despite this rash of bad news, it’s too early to write either the Dell-is-doomed or Dell-is-back story. Dell’s business model isn’t broken, and it’s not fundamentally challenged. No, for every trend, there comes a time when you can no longer simply extrapolate the results of the past into the future. It happens to every great company and to every great brand. Dell’s stock still trades at a significant premium to the market. Investors are willing to pay far more for a dollar of Michael Dell’s earnings than they are for a dollar of the S&P 500’s earnings today because they think his will grow faster. To a degree, Dell has finally fallen victim to the same malaise that has affected the other gigantic stock stars of the 1990s: Wal-Mart, General Electric, Microsoft, and Citigroup. They have undergone ungainly transitions from supercharged growth to merely impressive growth. At 21, Dell has belatedly entered its awkward adolescence.