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Dell earnings could show signs of slowdown

Analysts raise questions about the future, predicting that Dell will not continue to grow at its meteoric rate.

Golden boy Dell is looking a bit tired.

A slowdown appears to be in the cards for Dell Computer, which reports earnings today after the market closes. The stock dropped more than 10 percent in anticipation of the conference call and closed trading Friday below 90.

Hewlett-Packard will report earnings today as well, at 1 p.m. PT.

Few analysts, if any, are reading a crisis into the situation. The Round Rock, Texas, company is expected to report 31 cents in earnings per share for the fourth quarter, compared to 20 cents per share for the same quarter year before. For the year, Dell is expected to report earrings of $1.06 for fiscal 1999, which ended in January, compared to 64 cents a share for the previous year.

Many, in fact, are reiterating their rating on the stock in the face of the decline.

The questions seem to concern the future. Quite a few analysts believe that Dell cannot continue to grow at the meteoric rate of the recent past, and the drop in the stock price reflects this new reality.

"Top-line growth for the January quarter is about 40 percent year-over-year, compared to 56 percent for the last eight quarters," said Ashok Kumar, computer analyst with Piper Jaffray. Dell's stock, he pointed out, has grown at a rate of 194 percent a year while earnings have grown at a rate of around 37 percent.

"Sooner than later fundamentals catch up to reality," Kumar said.

The slowdown comes as a result of factors in the corporate computing market, Dell's main terrain. Dell and the other major vendors have been growing at rates faster than the market as a whole by plucking accounts from second- and third-tier vendors. But, as these opportunities vanish, growth is getting harder to come by.

Declining hardware prices is also exacting a toll on PC makers.

"Competitive pressure has intensified, especially in the corporate market," said Dan Niles, an analyst with BancBoston Robertson Stephens.

Another factor that may be affecting Dell's growth is the Y2K problem, Kumar added. Many of Dell's customers have already upgraded their systems to counteract the bug. As a result, the company is not experiencing panic buying, which could add to the bottom line of other vendors.

Of course, few are writing the company off. A number of large corporate resellers and distributors reported less-than-spectacular financial results last week. While several factors have likely contributed to the fall, competition from direct sellers, especially Dell, is cited as one of the prime reasons these companies are feeling the pinch.

"I think these guys are toast. I don't things it's any coincidence that in the last three months five of the largest distributors of computer stuff have all puked up their quarters," while Dell has continued to grow, said Jeff Matthews, general partner in Ram Partners, a Greenwich, Connecticut, investment firm.

Bloomberg contributed to this report.