Michael Dell is buying. That was the word on the street on January 2, when the chairman and CEO of the number two PC maker, Dell Computer, added nearly 12 million shares to his already rather substantial holdings by exercising options. It was a hopeful sign and reversed the overwhelmingly bearish trading pattern of Dell senior executives and directors, whose insider sales dwarfed purchases by a ratio of more than one hundred to one in the fourth quarter of last year. Securities and Exchange Commission filings show that Dell himself sold some 18 million shares—and purchased none—in 2000. Of course, Dell’s risk in investing in his company’s battered shares was tempered by the exercise price of his options, which ranged from $0.98 to $4.63 per share. Less fortunate investors, many of whom watched in disbelief as their shares in Dell’s company tumbled 66 percent last year, are licking their wounds and wondering whether shares of the bellwether computer manufacturer have finally hit bottom and the low share price presents a buying opportunity.
The good news is that the stock showed strength in the wake of the mid-January announcements of layoffs at Gateway and a profit warning from Hewlett-Packard. In the weeks following Michael Dell’s January 2 purchase, the stock rose a healthy 38 percent. Still, Dell and its PC industry cohorts Apple Computer, Compaq, Gateway, and Hewlett-Packard are all sharply off their 52-week highs.
Of the beleaguered PC makers, Dell’s shares are selling at a relatively rich multiple, about 30 times earnings, compared with an average of 19 for Gateway, Hewlett-Packard, and Apple Computer. That premium reflects the market’s belief that Dell has an advantage, thanks to its recent push into higher-end computers, which still show signs of growth. “Dell has aggressively moved to increase the business it derives from storage and servers,” says David Bailey, a computer hardware analyst with Gerard, Klauer, Mattison, and Company. (Nevertheless, for the quarter ending October 27, 2000, Dell derived more than half of its net revenue from its desktop-computer product line.) Dell’s extension of its fabled direct sales model to more-expensive products makes it the best-positioned personal computer maker for today’s challenging environment, says Bear Stearns analyst Andrew Neff. More encouraging still, Dell appears to be leading a successful price war