Will Dell Technologies be a trillion dollar stock by 2040?

Dell Technologies (DELL 3.53%)one of the world’s largest PC and server makers, went public in 1988. Its business initially flourished as the desktop and laptop markets grew, but ran out of steam after the dot-com crash.

From 2000 to 2013, Dell’s PC sales slowed, it “sore” its business with expensive acquisitions and missed the move to mobile devices. In late 2013, Michael Dell and Silver Lake Partners took the company private for $25 billion.

Image source: Getty Images.

That seemed to mark the end of Dell as a public company. However, as a private company, it divested its weaker businesses and streamlined its core businesses to computers, servers and data storage. In December 2018, it went public again in a complex deal that required it to buy back some of its tracking stock in VMware to skip the typical initial public offering process.

Dell then divested its stake in VMware, which was acquired by Broadcom last year, and the rest of the company is now worth about $82.5 billion. Could it continue to grow and become a trillion dollar stock by 2040?

Dell is still a slow growing company

Dell operates two main businesses. In fiscal 2024 (which ended in February), it generated 55% of its revenue from its customer solutions group, which sells PCs and PC peripherals. Another 38% came from its infrastructure solutions group, which sells its servers and data storage products.

Dell is the third largest computer manufacturer in the world and the largest server manufacturer. Follow behind Lenovo and HP in the PC market, but is comfortably ahead of its closest competitors in the server market: Hewlett Packard EnterpriseLenovo and Super Micro Computer.

But the PC and server markets are heavily traded, highly cyclical and vulnerable to macroeconomic headwinds. That’s why Dell’s revenue growth has slowed significantly over the past two fiscal years.

Data source: Dell Technologies.

Dell’s customer solutions revenue rose in fiscal 2022 as the pandemic prompted more people to upgrade their computers. But that market has cooled since that burst of growth, and inflationary headwinds for consumer spending have exacerbated its slowdown.

The infrastructure solutions business benefited from growing data center market demand for new AI-optimized servers, but this gain was offset by sluggish data storage hardware sales. That’s why Dell’s growth stagnated in fiscal 2024.

But its growth should stabilize over the next few years

Dell expects both its customer and infrastructure businesses to return to growth in fiscal 2025 as the PC market stabilizes, it sells more dedicated AI servers and market demand for new data storage hardware heats up from new. In other words, the company likely crossed its cyclical threshold in fiscal 2024.

Over the long term, management expects to grow its annual revenue at an average rate of 3% to 4%, adjusted earnings per share (EPS) of more than 8%, and consistently allocate at least 80% of cash free adjusted. flow (FCF) to buybacks and dividends.

Could Dell Become a Trillion Dollar Tech Stock?

That’s a solid outlook, but it probably won’t turn Dell into a trillion-dollar stock. Assume that from fiscal 2024 to fiscal 2040, revenue has a compound annual growth rate (CAGR) of 4% and adjusted EPS has a CAGR of 8%.

That trajectory would nearly double Dell’s annual revenue from $88.4 billion to $165.8 billion and boost adjusted earnings from $7.13 to about $25 a share. If it still trades at 15 times forward earnings by then, its stock price would be $375. This would represent a gain of nearly 220% from the current price and increase the market capitalization to about $264 billion.

Even with a more generous forward price-to-earnings ratio of 20, Dell’s stock would only rise about 320% to $500 and raise its market cap to about $370 billion. So unless its growth accelerates unexpectedly or it acquires other, much faster-growing businesses, it probably won’t come close to joining the four-point club until 2040.

That said, Dell could still be a solid long-term investment. Its shares are cheap compared to its peers, pay a decent 1.5% forward yield and plan to return most of the cash to its investors. Its growing sales of dedicated AI servers should also offset slower growth in its legacy PC, data storage and non-AI server businesses for the foreseeable future.