Dell: AI Growth Inflection Just Beginning (NYSE:DELL)

Dell: Buyers came back with conviction

Dell Technologies Inc. (NYSE:DELL) investors avoided another blow as August 2024 DELL lows held firm. As a result, bearish buyers have returned to add to the stock’s buying momentum, even as arch-rival Super Micro (SMCI).) the stock suffers to gain traction. Therefore, the valuation between SMCI and DELL has closed considerably, narrowing the previous valuation bifurcation between the main competitors in the AI ​​server infrastructure market. Coupled with Super Micro’s recent 10,000 filing delays, DELL’s relative performance to SMCI has been nothing short of astounding.

In my previous bullish update on Dell, I indicated why the company’s AI growth inflection looks promising. We also pointed out that the company is well positioned in the AI ​​server market, following the strong reading from Super Micro’s earnings release.

As a result, DELL has outperformed SMCI since February 2024, though its valuation is still rated as relatively attractive. Moreover, its well-diversified ISG portfolio has helped mitigate the margin pressure it faces in the increasingly competitive AI-optimized server business.

As a result, Dell continued to gain market share as it sought to overtake its rivals in the enterprise and SMB space. In addition, Dell has made solid progress with Tier 2 cloud service providers, underscoring its competitiveness. As a result, Dell has been able to mitigate the short-term profitability impact in its ISG business as it expands, further supported by its core “traditional” server business. As a result, Dell indicated that the company has seen an inflection in business demand growth in its core server business, suggesting that the weakness in business demand has likely bottomed out. Moreover, the continued strength of Dell’s nascent AI business should support the company’s ability to sustain its profitability growth inflection, potentially avoiding the significant impact on profitability seen in SMCI’s thesis.

Dell’s AI growth is supported by its core server business

I estimate that I underestimated Dell’s bullish proposition in the core server business. I was concerned that the maturing opportunities in its “traditional” business might impede a potentially more robust growth cadence in its AI server business. Despite my caution, Dell demonstrated its ability to deliver a growing backlog that reached $3.8 billion in its fiscal second quarter. Furthermore, management pointed out that it saw $3.2 billion in AI server orders “led by Tier 2 CSPs.” Therefore, I assess that despite unforeseen delays in the delivery of Nvidia ( NVDA ) Blackwell chips, Dell’s more robust enterprise base has proven its mettle.

Moreover, management is confident that the growing adoption in its enterprise base is still in the early stages. Therefore, despite hyperscaler demand growth rates that may slow through 2026, Dell’s ability to transition its current enterprise customers to its AI-optimized portfolio should not be underestimated. Accordingly, the company should demonstrate its ability to lift its AI-related margins as it takes on Super Micro in the AI ​​space.

Furthermore, investors should not ignore Dell’s opportunities to target the “aging installed base” of its core server business. The need to increase efficiency as enterprise customers invest in AI has spurred the initiation of earlier hardware refresh cycles. Dell is therefore well-positioned to benefit from refresh cycles in its core server infrastructure while positioning itself to gain more share over SMCI in server AI opportunities.

Dell’s margins are expected to remain solid

I assess that the market seems increasingly confident in Dell’s abilities to exceed its past tepid growth rates as it capitalizes on its core server refresh and growing AI build-up.

Additionally, Dell’s ability to pay a forward dividend yield above its sector median underscores management’s confidence in its capital allocation strategies. Given its more diversified portfolio, this should support market confidence that Dell could experience less volatility in profitability than SMCI posted.

Wall Street estimates for Dell were also raised, boosting the company’s bullish proposition and potentially improving buying sentiment.

Is DELL stock a buy, sell or hold?

DELL’s price action suggests that runaway buyers have returned aggressively to help the stock slide lower in August. Its ‘B+’ momentum grade corroborates my confidence in its ability to regain its uptrend, suggesting that its August lows should hold decisively.

Additionally, its relatively attractive valuation suggests that the stock is not overvalued. DELL’s pre-adjusted PEG ratio of 1.17 is more than 35% below its sector median. Therefore, I assess that the market has already reflected significant execution risks in its AI growth outlook as the company attempts to dethrone SMCI’s market leadership.

In addition, the market may also be concerned about Dell’s transition risks from its core server business, potentially further diluting its profitability margins. Despite my caution, I’ve determined that the risk/reward for DELL still looks favorable.

Rating: Maintain Buy.

Important Note: Investors are reminded to do their due diligence and not to rely on the information provided as financial advice. Consider this article supplementing the necessary research. Please always apply independent thinking. Note that the rating is not intended to time a specific input/output at the time of writing, unless otherwise stated.

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