Is Dell Technologies Stock a Buy Now?

Dell Technologies (DELL) has made a remarkable comeback, achieving an impressive 81% return so far in 2024. The technology giant is riding a significant wave of demand for artificial intelligence (AI) infrastructure solutions that are leading to strong growth and an optimistic earnings forecast.

As a result of this success, Dell has earned a spot in the S&P 500 index, underscoring its status as a leader in the industry and a blue-chip stock. However, this stock has also faced considerable volatility, currently trading 25% lower than its peak of $179.70 reached on May 29.

Let’s explore if this is the right moment to add Dell Technologies to your investment portfolio.

The Growth Fueled by AI

Artificial intelligence has quickly become one of the most significant trends in the tech sector over the past few years. Innovations in machine learning and generative AI are already demonstrating profound capabilities to improve productivity and efficiency across various industries. There is a strong belief that the advancements in AI applications are just starting.

While specialized AI chips from companies like Nvidia and Advanced Micro Devices are critical to AI’s success, having a robust ecosystem of hardware is equally vital. Dell’s servers, which integrate AI chips with data center networking equipment, are at the forefront of this rapid growth trend.

Recent results have shown that Dell is effectively capitalizing on this momentum. In the second quarter (ending August 2), Dell reported a 38% surge in revenue for its infrastructure solutions division compared to the same quarter last year. This increase offset challenges faced in the weaker consumer segment related to personal computers (PCs) and accessories.

The shift towards valuable AI products has also led to improved profitability for Dell, despite ongoing cost concerns and heavy investment requirements.

For the entire year, Dell is projecting around 10% revenue growth and an adjusted earnings per share (EPS) estimate of $7.80, indicating a 9% growth from the previous year. Looking ahead, Dell anticipates annual revenue growth of between 3% to 4% and an EPS rise above 8% in the long term.

Strong cash flow has empowered ongoing share buybacks and debt management, reflecting solid fundamentals with the expectation of continued positive trends.

Dell's Leadership in AI Hardware

Dell Technologies’ appeal as an investment stems from its extensive product range and leading market share in key server, PC, and storage categories. Despite facing intense competition and sluggish growth in specific segments, there remains a sense of optimism regarding the emerging opportunities in the AI sector.

Dell estimates that it operates within a sizable $121 billion addressable market for hardware and services, which is projected to increase by 44% to reach $174 billion by 2027. Strengthening its leadership position should, in turn, yield profitable growth.

By 2025, Dell appears well-placed to benefit from a potential recovery in the consumer PC market. Favorable macroeconomic conditions projected through to 2025, combined with expected interest rate cuts from the Federal Reserve, could stimulate a PC refresh cycle driven by improved consumer credit conditions. The positive outlook for the stock hinges on Dell’s ability to exceed market expectations.

Another significant industry development is the turmoil faced by competitor Super Micro Computer. This company, which offers AI-optimized high-performance computing servers, is grappling with an accounting scandal following the resignation of its auditor in October, creating considerable uncertainty around its future. Dell could potentially gain market share by attracting customers looking for a reliable alternative.

However, some caution is warranted. Dell shares are currently trading at 18 times the full-year EPS estimate, which represents a premium compared to its five-year average of around 11. While the high-growth AI server segment justifies this elevated valuation, it also increases the risks if the results do not meet expectations.

Is Dell Worth Buying?

In conclusion, Dell Technologies shares seem like a buy and represent a solid addition to a diversified portfolio, especially following the decline from this year’s peak levels. A robust report when the company announces its third-quarter earnings on November 26 could serve as a significant catalyst for the stock's upward movement.

Note: The author does not hold any positions in the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. They also maintain a disclosure policy.

Dell, AI, Invest, Growth