THE GOOD NEWS for storm-tossed tech investors is that Cisco Systems (CSCO) does not report earnings next week. The bad news is that Dell Computer (DELL) does.
So do several other notable tech companies, all of them struggling with the same business downturn that has humbled Cisco and the Nasdaq. Applied Materials (AMAT) and Sycamore Networks (SCMR) kick things off on Tuesday, followed by Global Crossing (GX) on Wednesday and Dell, Hewlett-Packard (HWP), Analog Devices (ADI) and Ciena (CIEN) on Thursday. Given the market's mood of late, that leaves Friday for counting new 52-week lows and wondering who will be next to warn.
But back to Dell, which plans to cut expenses by up to 10% and lay off as many as 4,000 employees, according to a story in Friday's Wall Street Journal. If Cisco didn't put paid to the notion that tech stocks have already priced in the current slump, Dell and its recent share price gyrations should.
When the leading manufacturer of personal computers slashed earnings expectations for the most recent quarter by almost a third on Jan. 22, its shares took a token 13-cent tumble — then rose 11.5% over the next five days.
This past Tuesday, on Day 1 B.C. (Before Cisco), two analysts issued notes highlighting persistent weakness in PC sales, with one, as an afterthought, plugging Dell and Compaq (CPQ) as the best in a woebegone sector. Dell shares surged 10% that day.
Yesterday, news of the imminent cost-cutting, which might have made investors stand and cheer the prospect of a fatter bottom line, reminded them instead that computer hardware is a troubled industry. Dell shares plunged 9.8%.
What is and isn't priced into a stock is ultimately a theological debate, involving as it does assumptions about the assumptions made by millions of buyers and sellers. Some outcomes — our deaths, the exhaustion of the Sun, Amazon's (AMZN) turning a real profit — are clearly too remote to contemplate even for those clinging to the quaint notion that share prices are not complete abstractions.
Here's a less abstract tidbit: Dell is the company doing the most to further the idea that computers are turning into a low-margin commodity like pagers or toasters. The box maker has declared a price war that's pumped up its market share at the expense of operating margins. J.P. Morgan analyst Walter J. Winnitzki, who rates Dell only a Market Performer, sounded the alarm on Friday:
"In the past, Dell has been able to take advantage of rapidly declining component prices to pass them on to customers in the form of price reductions without negatively impacting its financial model. However, currently Dell is cutting prices ahead of realizing adequate cost and efficiency savings. As a result, its operating margins and EPS have collapsed in Q4 (to be reported next Thursday). ... Thus, our take on the current period is that this is not the Dell model working as it has so well as in the past!"
Improved market share would be a great boon if margins on the manufacture of PCs or their decelerating sales were expected to rebound some time soon. They are not. So if Dell's strategy succeeds, it will end up a low-margin manufacturer of a price-sensitive consumer product. Plenty such firms make a decent living. But their stocks don't trade at a forward price-to-earnings ratio of 30.7, a number that will only climb if, as investors now expect, Dell slashes earnings estimates for the current year on Thursday.
What else is there to look forward to? Well, JDS Uniphase (JDS), which this week received regulatory approval for its takeover of SDL (SDLI), has promised an update on its "business environment" on Monday or Tuesday. Odds are, it will not be describing it as balmy.
More encouragingly, monthly retail sales data released Tuesday are expected to show a decent increase over January 2000, suggesting that the sharp drop in consumer confidence has not translated into fewer trips to the mall. January figures posted by many retail chains on Thursday also showed sales holding up, but the sector sold off as investors worried about the heavy discounting being used to prop up revenues. Michael Dell, please take note.
So do several other notable tech companies, all of them struggling with the same business downturn that has humbled Cisco and the Nasdaq. Applied Materials (AMAT) and Sycamore Networks (SCMR) kick things off on Tuesday, followed by Global Crossing (GX) on Wednesday and Dell, Hewlett-Packard (HWP), Analog Devices (ADI) and Ciena (CIEN) on Thursday. Given the market's mood of late, that leaves Friday for counting new 52-week lows and wondering who will be next to warn.
But back to Dell, which plans to cut expenses by up to 10% and lay off as many as 4,000 employees, according to a story in Friday's Wall Street Journal. If Cisco didn't put paid to the notion that tech stocks have already priced in the current slump, Dell and its recent share price gyrations should.
When the leading manufacturer of personal computers slashed earnings expectations for the most recent quarter by almost a third on Jan. 22, its shares took a token 13-cent tumble — then rose 11.5% over the next five days.
This past Tuesday, on Day 1 B.C. (Before Cisco), two analysts issued notes highlighting persistent weakness in PC sales, with one, as an afterthought, plugging Dell and Compaq (CPQ) as the best in a woebegone sector. Dell shares surged 10% that day.
Yesterday, news of the imminent cost-cutting, which might have made investors stand and cheer the prospect of a fatter bottom line, reminded them instead that computer hardware is a troubled industry. Dell shares plunged 9.8%.
What is and isn't priced into a stock is ultimately a theological debate, involving as it does assumptions about the assumptions made by millions of buyers and sellers. Some outcomes — our deaths, the exhaustion of the Sun, Amazon's (AMZN) turning a real profit — are clearly too remote to contemplate even for those clinging to the quaint notion that share prices are not complete abstractions.
Here's a less abstract tidbit: Dell is the company doing the most to further the idea that computers are turning into a low-margin commodity like pagers or toasters. The box maker has declared a price war that's pumped up its market share at the expense of operating margins. J.P. Morgan analyst Walter J. Winnitzki, who rates Dell only a Market Performer, sounded the alarm on Friday:
"In the past, Dell has been able to take advantage of rapidly declining component prices to pass them on to customers in the form of price reductions without negatively impacting its financial model. However, currently Dell is cutting prices ahead of realizing adequate cost and efficiency savings. As a result, its operating margins and EPS have collapsed in Q4 (to be reported next Thursday). ... Thus, our take on the current period is that this is not the Dell model working as it has so well as in the past!"
Improved market share would be a great boon if margins on the manufacture of PCs or their decelerating sales were expected to rebound some time soon. They are not. So if Dell's strategy succeeds, it will end up a low-margin manufacturer of a price-sensitive consumer product. Plenty such firms make a decent living. But their stocks don't trade at a forward price-to-earnings ratio of 30.7, a number that will only climb if, as investors now expect, Dell slashes earnings estimates for the current year on Thursday.
What else is there to look forward to? Well, JDS Uniphase (JDS), which this week received regulatory approval for its takeover of SDL (SDLI), has promised an update on its "business environment" on Monday or Tuesday. Odds are, it will not be describing it as balmy.
More encouragingly, monthly retail sales data released Tuesday are expected to show a decent increase over January 2000, suggesting that the sharp drop in consumer confidence has not translated into fewer trips to the mall. January figures posted by many retail chains on Thursday also showed sales holding up, but the sector sold off as investors worried about the heavy discounting being used to prop up revenues. Michael Dell, please take note.
