3 must-have quotes from Dell Management Point to Monster Growth next year

One “old tech” stock that has emerged as a real AI player this year is Dell Technologies (DELL -4.13%).

Dell, of course, started out as a personal computer giant after founder Michael Dell started building PCs out of his dorm room and selling them directly to consumers. Fast forward to today, and Dell has become one of the largest suppliers of enterprise and personal computers, as well as the largest branded enterprise server company, after buying server giant EMC in 2016.

As a result of the excitement for the new AI servers, the stock is up 52.8% this year. But in its recent earnings release, management offered three big reasons why Dell should see strong growth continuing into 2025.

An AI pipeline “multiplies” current backlogs

Dell sold off after its first-quarter earnings report in May as analysts came to doubt the margins it was making on its AI servers. But Dell’s AI-optimized servers achieved sequentially improved margins, and operating margins for the overall server business improved from 8% to 11%.

That should have allayed investors’ fears, as should management’s comment about future demand. Some investors have wondered how long the AI ​​spending boom can last, but Dell said there really hasn’t been any slowdown in demand for it.

Dell made $3.2 billion in AI-optimized servers on $7.7 billion in server and networking revenue in Q2, up 23% sequentially. And while Dell noted that its AI server inventory was “only” $3.8 billion, up just 19% sequentially from Q2 and pointing to a potential deceleration, management noted that demand has continued to grow, with a potential pipeline that is “multiples” of current stock.

While skeptics may note that a pipeline is not actually the same as firm orders, management suggested that this was likely a supply issue, not a demand issue:

Deployments and scheduled deliveries to customers are what we have to manage again — a lot of it is very complex deployments: data center preparation, power availability, cooling preparation; if direct liquid cooling, the ability to have water in the data center. And all this infrastructure has to be implemented and coordinated with the delivery of a GPU on a server. And that’s what we work through. There are clearly opportunities that we are working on in our customer set in terms of the technologies that they want to deploy. … Again, I’m trying to reinforce, five-quarter pipe is multiples of arrears. There is demand there.

CEO Jeff Clarke also noted that many enterprises are still in the “early stages” of implementing AI. So there doesn’t seem to be any change in the high demand for AI.

Traditional Servers Coming Out of ‘Longest Digestion Period’

Not only are AI-optimized servers taking off, but traditional servers are also in the early stages of a comeback. As much attention as AI is getting, traditional servers still made up the majority of Dell’s server and networking segment last quarter, not to mention the company’s storage business.

Dell noted that its traditional server portfolio has grown sequentially for five consecutive quarters, posting three consecutive quarters of year-over-year growth as that subsegment slowly emerges from its longest slump ever.

Dell sees more growth based on artificial intelligence. Image source: Getty Images.

But there could be much more growth in traditional servers. This is for a few reasons. First, traditional servers suffered the longest decline in two years. That’s because, first, there was a hangover from the torrid pandemic-era growth seen in 2020 and 2021. Then, as things started to pick up, AI took off, meaning IT managers have had to dedicate most of their budgets to new AI servers and keep off on refreshing traditional servers.

But that can only last so long. The installed base is now old, and especially new server designs take up less space in the data center, making more room for AI machines and the power these AI machines need. Clarke noted:

(I) If I were to look at a 14G, a product that we shipped over four years ago to a 16G that we ship today, our product today has 2.5x to 3x more cores in it. It is 25% to 35% more energy efficient and a single 16G server can replace three to five 14G servers in a rack. Consolidation will take place because space and power are needed.

Just like traditional servers, PCs are set to take off

Finally, while AI and servers are getting attention, Dell’s core PC business is still relevant, accounting for more than half of the company’s second-quarter revenue and 37% of operating income. Although Dell’s computing segment was only flat year-over-year, it could see impressive growth later this year and into 2025. Like traditional servers, the PC market collapsed after the pandemic and remained low, as budgets were constrained by high interest rates and a focus on AI.

Clarke noted on the call that there are several dynamics conspiring for a big PC comeback. First, the pandemic-era PC install base is old. Two new AI PCs with neural processing engines are just hitting the market, which should make IT managers want to upgrade soon. finally, Microsoft will end support for Windows 10 in October 2025, forcing many IT managers to upgrade.

Clarke noted on computers:

(A) If the refresh takes longer to start, history suggests that it comes back faster because the Windows 10 end-of-life date is not moving. So we have an end-of-life date for Windows 10. We have an aging installed base of machines bought during the COVID era, all set to be refreshed with exciting new products built around AI, and more AI applications to come.

Dell is part of the AI ​​portfolio

For those looking to assemble the AI ​​portion of your portfolio, Dell might be a name to add. It has a more reasonable valuation than some of the high-flying semiconductor names, at just 15 times next year’s earnings estimates. But with AI servers continuing to be in high demand and traditional servers and PCs set to rebound, look for this “old tech” standby to easily beat 2025 revenue estimates.