Dell’s laser focus on AI: Is it the next winner no one’s talking about?

You may have heard that some of the biggest tech giants are planning to build enormous data centers to power artificial intelligence (AI) and many other functions, but the scale may surprise you.

Companies like Amazon, Alphabet, Microsoftand xAI (founded by Elon Musk) require centers that can exceed 1 million square feet. The centers house thousands of servers, racks and other infrastructure, and demand is likely to grow. As shown below, construction of massive data centers is accelerating.

Important, della (DELL -4.82%) it doesn’t just make computers; it also provides critical infrastructure to this industry.

Image source: Statista.

Momentum in key segments

Dell is a key partner when the aforementioned “hyperscalers” build data centers. Along with Super Micro ComputerDell is a supplier for xAI’s ambitious project to build the world’s largest supercomputer. The site will contain 100,000 Nvidia GPUs and occupies more than 750,000 square meters. With Super Micro struggling right now and delaying its annual 10-K filing, Dell could see an even bigger share of the work.

Dell’s most recent results (for the second quarter of fiscal 2025, ended Aug. 2) saw $3.2 billion in revenue for AI-optimized servers, up 23 percent from the previous quarter. Traditional server sales also rose for the fifth straight quarter, as the Infrastructure Solutions Group (ISG) segment hit $11.6 billion, up 38% year-over-year. This segment generated overall revenue growth of 9% to $25 billion, despite a challenging consumer PC market.

The ISG segment still has a long way to go. Dell predicts that its addressable market will grow from $79 billion in 2023 to $174 billion in 2027, which is great news for investors.

More positives for investors

Positive free cash flow is the lifeblood of business and one of the critical factors I look for in a company. It allows the company to fund growth, pay dividends and share buybacks, and finance operations without being saddled with too much debt. Dell reported $1.3 billion in free cash flow last quarter and $6.1 billion in the trailing 12 months.

Dell raised its dividend 20% this year to $1.78, yielding 1.5%. The yield is nothing to say; however, the company plans to increase the dividend by 10% annually through fiscal 2028. Plus, you don’t typically buy tech companies for income. Think of it more like a bonus.

Dell is also buying a lot of stock — $3 billion in the past 12 months, nearly 4 percent of its current market cap. With the company planning to return 80% of its free cash flow to investors, the pace of buybacks will likely continue, further reducing the number of shares and increasing value for investors.

Is Dell overrated?

This is a great question. As you can see below, the company’s price-to-earnings ratio is higher than its recent average, even after the recent decline; however, it falls below this on a forward basis.

DELL Data PE Report by YCharts

In addition, forward rates are based on analyst estimates. I think Dell can beat these estimates due to the intense demand and challenges facing Super Micro. There are no guarantees in investing, just a calculation of risks and rewards. Still, I see a path to market gains for Dell investors in the next fiscal year and beyond.