Shares of Dell Inc plunged 18 percent Wednesday, on track for their biggest single-day loss in more than a decade, after a disappointing revenue forecast spurred fears that global tech spending is weakening faster than anticipated.
Lenovo (0992.HK), which reported results overnight that benefited from its dominance in the still rapidly expanding Chinese market, fueled concerns after warning that it too saw a slowdown in U.S. and European corporate spending on PCs.
Shares in global leader Hewlett Packard (HPQ.N) slid 4.5 percent at midday, just hours before it is expected to announce quarterly results and outline sweeping layoffs of more than 8 percent of its global staff.
The accelerating popularity of mobile computing devices such as Apple Inc’s (AAPL.O) iPad has been eroding PC sales for years. To combat the erosion in sales to consumers, as well as dwindling margins as companies compete on price, Dell and HP have been gradually focusing more on sales to large enterprises.
Dell has been diversifying its revenue base in the face of weakened consumer demand, giving up low-margin sales to consumers and moving into higher-margin areas, such as catering to the technology needs of small and medium businesses in the public sector and the healthcare industry.
But now many analysts see this transition, which Dell began a few years ago, as a lengthy process.
“While we think that Dell’s story of improving mix is still valid, it will take a long time to play out,” BMO Capital Markets analyst Keith Bachman said.
Dell shares have lost half their value since the high-profile return of founder Michael Dell to the company’s helm in January 2007. His return was hailed as pivotal in regaining the market share ceded steadily to an aggressive HP in the preceding years, but in five years Dell has continued losing ground, especially in the consumer arena, to HP and Lenovo.
RUSH TO CUT
Lenovo can rely on China to propel revenue growth and boost its bottom line. The company commands more than half of the world’s second-largest personal computer market.
“IT demand softened unexpectedly in the month of April,” Raymond James analyst Brian Alexander wrote. “While Dell walked away from business as the quarter progressed, it initially took more deals that did not meet its profit objectives.”
Dell shares were down $2.70 to $12.38 on Nasdaq in afternoon trading after it forecast revenue of $14.7 billion to $15 billion in the current quarter, well short of analysts’ average forecast of $15.4 billion.
The stock is on track for its worst single-session showing since November 2000, when the shares plummeted 18.9 percent in a single day.
Wall Street brokers, including RBC, Jefferies and Evercore, cut their price target on Dell shares.
A cautious IT spending environment and challenges in its PC business will keep dogging Dell in fiscal 2013, BMO Capital Markets analyst Jung Pak wrote in a research report, cutting the price target on the stock to $16 from $18.
Analyst Rob Cihra of Evercore Partners said Dell may be forced to cut its prices in order to boost revenue.
“We think Dell continues to walk away from just too much business in the name of margin stability,” Cihra said in a research note.
“We just don’t see how Dell can keep trying to avoid competitive pricing,” he added, noting that the company will otherwise have a hard time differentiating its computers, which, like its rivals’ products, are based on Intel Corp (INTC.O) chips and Microsoft Corp (MSFT.O) software.
Dell’s first-quarter earnings and revenue were also lower than expected, hurt by weak sales to consumers, large enterprises and government units.
“The non-PC transformation is not big enough yet to absorb acute pains in PCs,” said JPMorgan Securities analyst Mark Moskowitz, who cut his price target to $19 from $21.