Magazine article Newsweek

How High the Moon? When Good Companies Are Bad Investments

Magazine article Newsweek

How High the Moon? When Good Companies Are Bad Investments

Article excerpt

For the past five years, dell Computer has coined more money than the U.S. Mint. Making even Microsoft look like a low-flier, Dell's stock- market value has risen from less than $1 billion in February 1994 to more than $100 billion. Chairman Michael Dell, who's all of 34 years old, has become one of the dozen richest people in the United States. And there are plenty of Dellionaires keeping Michael company. Anyone lucky or farsighted enough to have plunked down $2,100 for 100 shares of Dell on Feb. 18, 1994, now owns 3,200 shares, worth around $256,000 at last Friday's closing price. A 120-to-1 return in five years. Not too shabby.

So why was there endless weeping and wailing about Dell on Wall Street last week? Because in early February, Dell was selling for as much as $110, almost 40 percent higher than Friday's price. What happened? Did the company lose money? Did its profits drop? Did its computers become obsolete? Nope. The problem is that its revenues for the three months ended Jan. 29 were up only 38 percent, less than the Street expected. Only 38 percent, a figure most companies would kill for. So even though Dell's profits per share for the quarter were up 55 percent, as Wall Street expected, the stock tanked. Massive selling drove it down more than $20 a share, cutting its stock-market value by about $25 billion.

Hello? What kind of world are we living in when 38 percent sales growth whacks tens of billions of dollars off a company's stock-market value? A world in which fantasies and ridiculous expectations have driven prices of some market favorites to the moon. Proving, once again, a point that we old fuddy-duddies keep making over and over: the stock of even a marvelous company can turn out to be a less-than- marvelous investment if you buy it at an insanely high price.

Unlike ephemera, such as Internet stocks, where you're buying potential, hype and moonbeams, Dell is a real company with real revenues ($18.2 billion in fiscal 1999) and serious profits ($1.46 billion). Dell peddles made-to-order personal computers directly to consumers. In 1998 it sold 7.77 million machines, according to International Data Corp. of Mountain View, Calif. But anyone who thought that Dell's profits and stock price could continue expanding exponentially forever was ignoring the laws of numbers. Unless the law of gravity is repealed, it's impossible for Dell stock to replicate its performance over the last five years, which have seen its stock rise from 66 cents, adjusted for stock splits, to its current level. At Friday's price, Dell's 1.27 billion shares were worth about $102 billion. If the stock were to continue rising at the same rate for another five years, Dell would be worth 120 times what it was on Friday. …

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