Cdw Corp's (O:CDW) business is built on reselling technologies. The company’s offerings span storage equipment to server systems. As much as CDW portrays itself as a technology company, there are some kinds of technologies that are a threat to its wellbeing. Cloud is one of the emerging technologies that are threatening to disrupt CDW’s business, which leans on more traditional technologies like PC’s.
But, is CDW Corp (NASDAQ:CDW) disrupted all the way or is it also a source of disruption?
Highly flexible business model
CDW boasts a more flexible business model that allows it to quickly shift focus to technology trends that are attracting more IT spending. By being a technology vendor that facilitates technology evaluation and delivery, CDW has mastered the art of survival in tough times.
The nature of CDW is that it is swift to move where opportunities are and swift to walk out of troubled waters. The result of this is that CDW has been consistent in posting annual revenue improvement over the last five years with more stable profit margins compared to the competition.
The chart below shows CDW’s revenue trend between 2010 and 2014.
Benefit of a broad portfolio
CDW Corp (NASDAQ:CDW) has mostly been taking share from value-added-resellers with more pointed portfolios thanks to its more diversified portfolio. With a broader product portfolio, CDW enjoys multiple benefits over the competition. For example, the company is able to keep its sales growing even when some segments of the market aren’t doing well and competitors are suffering.
In recent times, CDW’s portfolio diversification has seen it target private and public sectors with software applications and other solutions outside its mainstays such as storage, servers and PC’s.
Because of a diversified portfolio, CDW enjoys greater customer stickiness. That has also strengthened its ability to displace rivals and take over their market share.
As long as CDW maintains a robust product portfolio and strong execution strategy, as it has demonstrated in recent times, the company is likely to continue taking share from the competition.
With that in mind, you see that CDW is placed favorably to continue posting above-average revenue growth.
Advantage of high exposure to U.S.
As CDW expands abroad, where the addressable market is huge but a little riskier, the company can count on its vast exposure to the U.S. as a buffer. Almost all of CDW’s incomes are generated in North America, with the U.S. being the largest market. As such, CDW can rely on the usually less volatile U.S. market to supply cash flow for investment abroad so that it avoids further straining its balance sheet with debt.
While the global market is promising, it is more infested with risks than the domestic market. For example, the economic pullback in China is disrupting many global markets from emerging economies to more developed ones in the West.
Global expansion
CDW Corp (NASDAQ:CDW) recently bought its expansion outside North America by getting ahold of the U.K.-based Kelway. In addition to helping CDW reach new customers abroad, the acquisition of Kelway will also allow CDW to smoothly extend support for its U.S. customers with multinational operations.
Some have worried whether the acquisition of Kelway could be signaling the beginning of tough times for CDW’s U.S. business. While markets get saturated and companies move to seek greater pastures elsewhere, it doesn’t appear like CDW’s buyout of Kelway is driven by fear over a maturing market at home. Instead, it does appear predicated on the desire to diversify its geographical footprint. Additionally, the acquisition could serve as an anchor for CDW to reach more international markets faster than it could naturally do.
Cloud isn’t immediate threat
CDW resells storage equipment and servers, which means that it is greatly exposed to the traditional hardware industry. Everyone knows what the cloud is doing to traditional hardware – cannibalizing it. What future does CDW have when its core business is being raided by cloud penetration? This question does concern many existing and prospective investors in CDW, yet it is easy to answer.
For one, it has already cited that CDW has a highly adaptable business model, which explains its ability to escape challenges and wrap opportunities at a moment’s notice. With that in mind, you see a company that can quickly leverage its large portfolio of products to markets that are insulated from cloud disruption.
Two, while cloud will eventually unsettle most industries, the disruption won’t be uniform. That should allow CDW time to refocus its strategies, possibly identifying new opportunities or figuring out how to tap into the disruptive cloud for its own benefit.
Potential pressures for CDW
Global economic cold
When China sneezes, many global economies catch the cold, and that has been true all the time. The latest economic slowdown is also reaffirming common sense. While CDW isn’t directly exposed to China because it almost exclusively draws its revenue from the U.S., the ripple effect of China’s economic troubles could catch up with it in multiple ways.
First, China is affecting the U.S. economy where CDW depends for nearly 95% of its revenue. If China’s economic cold remains in place for long, CDW will start to feel the heat as its topline growth slows.
China’s problems could also slow down CDW’s global expansion or make the expansion tougher than anticipated.
If China’s economic conundrum stretches for more months and also continues to spread abroad, it could get to a point where CDW is defenseless.
Maturity in U.S. market
While CDW Corp (NASDAQ:CDW) has not yet sounded the alarm about the U.S. market becoming a challenge ahead, there is a possibility of that happening. A saturated U.S. market could have a serious adverse implication on CDW’s business domestically and abroad. The assumption currently is that even if the U.S. market will mature at some point in the future, the process will be gradual, allowing CDW to reorganize itself for the next phase of growth. However, if maturity of the domestic market does happen faster than anticipated, it is likely to catch CDW off-guard, causing it great pain.
It is CDW’s U.S. operation that is funding its global expansion, which will take time before material benefits can begin to flow in.
Integration risk
Acquisitions almost always present integration risk, and CDW Corp (NASDAQ:CDW) could face multiple of them as it tries infusing Kelway into its system. Moreover, CDW could be disrupted if revenue contribution from Kelway fails to live up to its expectation, thus disrupting growth plans.
Bottom line
CDW Corp (NASDAQ:CDW) is a master at weathering storms. Cloud or whatever disruptions that may come, before you is a company that can convert stumbling blocks into stepping stones.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.