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THE DAY AHEAD: Dell can&#039t compete with its glory days

Dell Computer Corp. (Nasdaq: DELL) just can't compete with its glory days. The company hit its first quarter revenue and earnings targets and said the second half will be strong as usual. But Dell -- a victim of its own success -- didn't do enough to impress investors.

Put simply, it's not easy to impress Wall Street when you're one of the best-performing stocks in the last decade and have the valuation to show for it. Anything less than 50 percent revenue growth is a disappointment.

Dell: Is the magic gone?
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The computer maker met Wall Street estimates with revenue of $5.5 billion and earnings of 16 cents a share. The problem?

Dell merely met estimates. Without the upside, there are not a lot of excuses for investors to push Dell shares higher. These days reporting a quarter that hits estimates is almost the same as an earnings miss. Dell was also the only tech company reporting earnings last night that didn't beat estimates.

Dell can cream competitors such as Compaq (NYSE: CPQ) and Gateway (NYSE: GTW). It just can't beat itself. The gripes about Dell are ludicrous considering Hewlett-Packard (NYSE: HWP) can report revenue growth of 3 percent and that's considered great news.

CFO Tom Meredith told analysts on a conference call that second quarter sales growth will be in the "mid single digits" and hit the double digits in Dell's third and fourth quarters.

Investors get increasingly skittish in the summer and Dell's earnings did little to break shares out of their current sideways trend.

Nevermind that Dell CEO Michael Dell said he didn't foresee any problems with Year 2000. Forget that Internet sales tripled to $18 million a day. And forget that sales and earnings growth jumped more than 40 percent compared to a year ago. Big deal. Wall Street wants more.

Here are the gripes that will hinder Dell shares:

  • Gripe 1: You'll hear a lot about this one. Dell's gross margins fell to 21.5 percent from 22.3 percent a year ago and 22.4 percent in the fourth quarter. Analysts were expecting margins of 22 percent. Average selling prices fell to $2,300 from $2,475 a year ago.

    In the fourth quarter, Dell maintained margins, but didn't get drawn into price wars and revenue suffered. This quarter, Dell was aggressive and Wall Street frets about margins. Dell can't win.

  • Gripe 2: Revenue was $5.5 billion. Sure it hit targets, but USB Piper Jaffray analyst Ashok Kumar was hoping for an extra $200,000 at Compaq's expense. Amid the tough pricing environment, Kumar lowered his second quarter revenue targets to $5.81 billion from $5.9 billion. Earnings estimates for the year were cut to 69 cents a share from 76 cents a share.

  • Gripe 3: Europe sales as a percentage of revenue slipped to 24 percent from 27 percent last quarter. The company is still outpacing the industry overall and U.S. sales were strong, but may not stay that way.

    In the end, Kumar estimates that Dell shares won't move on fundamentals until the first half of 2000 when the computer maker gets a pop from Microsoft's (Nasdaq: MSFT) Windows 2000.

    Kumar sees a trading range between 38 and 47 in the short-term. "Dell currently trades 60 times forward consensus estimates. We expect this multiple to drop as estimate changes will have a negative bias," said Kumar.

    Awesome AMAT

    Sure Internet companies get all the attention, but investors should be giving Applied Materials (Nasdaq: AMAT) a little love too.

    Applied Materials business -- making semiconductor equipment -- may not be glamorous, but is one of the best ways to play the chip rebound. Applied easily topped estimates with earnings of 36 cents a share or 27 cents a share.

    Applied did what all the tech giants do -- grab marketshare during downturns. Here comes Applied's payoff.