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Dell is One Bright Spot in Bearish Surveys on Tech Sector

December 16, 2002

By Scott Herhold
Mercury News

Because analysts have been so badly discredited over the last few years -- fairly or unfairly -- a lot of smart investors these days are paying attention to customer surveys.

Two that passed by my desk in the last week offer somewhat different messages -- but maybe not quite so different as they might seem.

The first comes from a research outfit in Maryland, ChangeWave Research, which polls tech users -- and others -- on behalf of institutional and individual investors.

Over the last couple of years, ChangeWave has been bearish on tech. Its poll respondents -- people connected to buying decisions -- have been telling the sad story we know only too well.

That overall outlook hasn't changed much. But one piece of ChangeWave research broke the doleful mood on tech: It suggested its subscribers should buy Dell.

ChangeWave's basic take is that Dell (DELL), the low-cost, just-in-time PC manufacturer from Austin, is moving successfully into product lines other than the personal computers it's known for.

"Dell customers are buying high-end servers, data-storage systems and handheld products in larger numbers than many analysts anticipate," says Michael Shulman, ChangeWave's director of research. "It's good news for Dell, bad news for their competitors."

Consider a few numbers: When ChangeWave asked its 311 respondents whether they thought Dell would gain market share in PCs and servers at their company over the next six months, 51 percent responded yes.

More than a quarter -- 27 percent -- said their company would likely purchase high-end servers from Dell over that half-year. Seventeen percent said they were likely to buy high-end storage systems.

The good news is that these businesses offer more profit than the dog-eat-dog world of personal computers. And though Dell is not a cheap stock -- the price-earnings ratio is more than 36 -- the ChangeWave people predict that profit will go to the company's bottom line. Dell finished Friday at $26.

Who does it hurt? Well, ChangeWave suggests that some of Dell's competitors -- Gateway, EMC and Sun Microsystems -- will falter as the company picks up share. So far, though, they're not willing to predict the impact in the handheld market.

The second survey I saw comes from an Emeryville company called Techtel, which measures demand for technology products every quarter. For people who think that tech will quickly turn around, it offers a dose of caution.

The Techtel researchers found that during the third quarter, about 10 percent fewer companies were engaging in what's called "consideration" of new tech purchases. While that's only a preliminary signal, it usually predicts softness in selling.

Translation: The fourth quarter -- and the first quarter of next year -- aren't likely to be barn-burners for tech.

What's perhaps most interesting here, however, is Michael Kelly's theory about why fewer companies are considering big tech purchases.

Kelly, TechTel CEO, believes that the possibility of war with Iraq has made buyers pause. "It's something out of the business cycle," he says. "This time we didn't see it coming."

So, Happy New Year? Well, not quite. But as Kelly points out, the market can often move in unpredictable ways. A resolution of the Iraq crisis could mean a bigger bounce. Call it a peace dividend.