Dell’s six-day inventory created a lasting cash advantage

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 4:14

   Bill, tell us just a second about, because the 90s, I think, has some parallels to the period that we're living in now. So Dell was growing incredibly fast, obviously building low-cost, high-quality computers. What inspired you to start covering Dell? And then what led you to these insights? Did you just focus on that company? Was this a breakthrough piece of work for you? Well, Michael's heard this before, so hopefully it won't bore him. But I had worked in the PC industry. I spent over two years at Compaq in Houston. And interestingly, I think being inside of Compact, we had a view of Dell that wasn't as respectful as it should have been. And once I got outside and was able to look at the numbers in a different way, I was able to see things more clearly. But the gentleman that made this all click in terms, for me, was Michael Moveson,

2. 5:15

   who you know of. But he had taught me to look at return on invested capital. That's part of what Michael was referring to. The company had insane, you know, balance sheet turnover in a way that the cash flow relative to the earnings was really high and the ROIC was 10x anyone else in the business. And yeah, and then for some reason, probably just youth, I went and did a strong buy on the initiation, which Michael made a bunch of his employees rich. I ended up making a bunch of the salespeople rich there at CSFB just as a result of riding on their coattails. But it was quite a lot. The 90s were fun. The 90s were fun. I mean, you know, yeah, stock went up 130,000%. We had seven stock splits, four kits.

3. 6:10

   What was the value of the company when you went public? What was the total enterprise value or market cap when you went public, Michael? It was like $150 million or something like that. I mean, see, that's the beautiful thing. That's like, I mean, that is a series A in venture capital. It went up 100x after this initiation, like in the public markets. Yeah. So Bill, I just need you to recommend our stock one more time.

4. 6:35

   There was an element that I think is super interesting, like that was also part of what michael was referring to but their their inventory turns were so damn high compared to the rest of the industry so they were they were you know building to individual customer order they weren't building to inventory they're building to demand and um because component prices fell so much we calculated they got a 200 basis point gross margin advantage just by having the fifo q Oh, my goodness. That makes a ton of sense.

5. 7:10

   Yeah, exactly. Just in time. This was a structural competitive advantage. By the way, it still is. So the point is that the cost of the materials are always coming down. And if your competitor has, let's say, 90 days of inventory in a series of queues with distributors and dealers, and you have six days of inventory, which we actually had for about seven years in a row, six days of inventory, think about that, it's a structural competitive advantage because you have fresher inventory, you have fresher costs, and of course you don't have all that capital tied up and so your return on capital.

6. 8:00

   is essentially infinite, especially when you're paying your suppliers on a period longer than your customers pay you. And so, you have a negative cash conversion cycle, which we still have typically around negative 50 days cash conversion cycle. That's powerful. It's a beautiful thing. Yes, it is.