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Buy Recommendations on Dell and RIMM: Goldman Isn’t Talking to You

The research analysts at Goldman Sachs & Co. (GS) seems to be firmly in the “risk on” camp these days, boosting their rating on Dell (DELL) from an outright sell to a buy and coming out in favor of owning shares of beleaguered Research in Motion (RIMM) as well. In the first case, analyst Bill Shope believes that predictions of the demise of the personal computer may be premature, or at least that Dell will be able to figure out a way to offer value to both technology consumers and investors. In the latter, Simona Jankowski believes that the BlackBerry 10 – due out early in 2013 – could be a game changer for Research in Motion, putting it back in the game and giving it some more momentum in its battle for market share against the likes of Apple (AAPL) and Samsung.

DELL Chart

DELL data by YCharts

Both stocks have been dismal performers of late, as one can see in a stock chart, and for a very good reason: their earnings have plummeted as both, for similar reasons, have fallen victim to competition from Apple. But the reason for these declines went well beyond a business misstep; rather, Apple’s products and the changes that they have triggered have brought about a fundamental challenge to RIMM’s and Dell’s entire model and their raison d’etre. The advent of tablet computers is forcing PC manufacturers to revisit their strategy – and the growth rate in tablet sales remains explosive, with research firm Gartner projecting that sales will double in 2012 over last year’s levels. (Meanwhile, Gartner expects that the PC industry will shrink.) Research in Motion’s BlackBerry device has lost ground to smartphones, and its own foray into the tablet arena was a failure. (RIMM employees last year were able to offer their nearest and dearest the chance to snap up unsold inventory at a fraction of the retail price.)

DELL Net Income Quarterly YoY Growth Chart

DELL Net Income Quarterly YoY Growth data by YCharts

Goldman’s analysts believe that the market has already priced in the bad news with respect to the personal computer industry, and that investors still aren’t giving RIMM enough credit for its ability to pull off a coup with the BlackBerry 10. Mind you, Jankowski isn’t suggesting that the new device will be a big winner. Indeed, she argues the chance of that being the case is only about 30% -- but that those odds still aren’t priced into the company’s share price, based on PE ratio.

DELL PE Ratio TTM Chart

DELL PE Ratio TTM data by YCharts

Outsized value – or outsized value trap? Here is where it becomes important to think about Goldman Sachs’s target audience: institutional investors, hedge funds and wealthy individuals. If the analysts are making risky calls like this that suggest there is a reason to fly in the face of industry trends, they are making those recommendations to those who can afford to put a small portion of their assets under management into short-term trades of this kind. These are the kind of bets that retail investors can rarely afford to make, however, and there may well be such a thing as being too contrarian.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post.

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