JP Morgan Analyst Says Dell "Heading For Rough Waters"

Shope's analysis, in a report published Friday morning, sent shares of Dell stock tumbling in pre-market trading. The headline of the report said the company was "Heading for rough waters."

Among his remarks:

"Over the past two quarters, Dell's gross margins have been at the mercy of its microprocessor suppliers. In the July quarter, we believe Dell lost much of the subsidy Intel had provided it in the past, leading to nearly a 190 basis point sequential reduction in gross margins. The company then surprised investors with a 150 basis point rebound in the October quarter. The rebound was largely due to pricing concessions from AMD, in our view. . . In our view, these concessions for Dell are likely to be matched for HP given the company's similar size and higher AMD-based volumes."

And:

"...Blade servers now represent the fastest growing segment of the server market, but Dell remains far behind HP and IBM in this segment. We expect blade servers to represent an even more important driver of server growth in 2007, which should further complicate Dell's ability to expand its server business."

The analyst also said Dell's shortfalls in hot enterprise technologies including virtualization, blades and clusters could spill over to its services business, with customers simply needing more than "simple maintenance."

(For its part, Dell has taken some measures to try to stay ahead of the curve on services, as evidenced by its recent hiring of former EDS chief operating officer Steve Schuckenbrock to run its global services organization.)

Shope said this analysis of Dell's prospects could change if the company restructures itself or if ongoing investigations into Dell's financial reporting by the U.S. Securities and Exchange Commission and U.S. Attorney for the Southern District of New York have a happy ending.