Facing market-share pressure from HP, Dell has warned that it would miss its forecast for quarterly profits and barely match its lowest estimate for revenue.
Dell now expects revenue of $14.2 billion, versus its original estimate of $14.2 to $14.6 billion. The company is scheduled to release its quarterly earnings on May 18.
The company attributed the shortfall to a decision to cut prices in order to sell more computers. That strategy will produce a revenue dip in the second half of the first quarter, but generate strong growth in the future, said CEO Kevin Rollins in a statement.
Traders, however, pushed Dell shares down to a three-year low on Tuesday. By midday they had fallen $1.16 to $25.27.
"You can't continuously gain share by discounting," said Richard Doherty, research director with The Envisioneering Group.
It's true that Dell still holds the highest market share, but that leverage is useless unless Dell maintains its profit margins.
"Dell is still the market leader, but so is McDonald's, and Wolfgang Puck makes a lot more money," Doherty said.
Despite the revenue dip, Dell will maintain its position as the largest PC vendor in the world, judging by the number of computers shipped in the first quarter, according to numbers compiled by IDC analysts.
Dell's 18.1 per cent market share is closely followed by HP with 16.4 per cent share; all other vendors are in single digits. But HP is gaining fast, posting growth of 22.2 per cent comparing its shipments in the first quarter of 2006 with the previous year, far more than Dell's increase of 10.2 per cent.
The difference is even greater in the US, where HP grew at 15.8 per cent compared to Dell's growth of 0.3 per cent.
Some market watchers saw this coming. Richard Gardner with Citigroup downgraded Dell to "sell" from "buy" in his April 21 report.