Saturday, April 22, 2006

Dell Slaughtered on Downgrade: Huh?

Dell's gross margins could rapidly deteriorate if Dell (DELL) slashes prices in order to gain market share, went the tune on Friday.

Citigroup analyst Richard Gardner axed his rating on the stock to sell and said that as the company's cost advantage over competitors erodes, Dell could be forced to "reset" margins to gain share.

"The slow, steady erosion of Dell's cost advantage combined with the company's heavy exposure to saturated portions of the global market explain the recent collapse in Dell's unit growth premium versus the global PC market. We believe that the days of Dell growing at two- to three- times the rate of the market while maintaining a 500 to 1000 basis point operating margin premium versus competitors are gone forever," wrote Gardner.

Nevertheless, at 14 times next year's earnings, shares of Dell look tempting.

As long as founder Michael Dell stays with the company, we think DELL is great business to own. As the low cost leader in a commoditized business, Dell is the surest route to travel. Given Dell’s past history — and current cash balance ($10B large ones sitting on the books) — we believe Dell will cut through this cyclical fog faster than anyone on the Street thinks it will.

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