Analysts review Dell, Super Micro stock price targets on AI capabilities

And you thought space was the last frontier.

Star Trek fans know that every episode of the iconic sci-fi show began with Captain Kirk solemnly declaring that outer space was the last unexplored region.

Related: Analysts Revise Dell Share Price Target Ahead of Earnings

But that was before anyone – other than Trekkies – knew anything about artificial intelligence.

Now, this wildly new frontier promises to rewire the future and turn much of the science fiction technology into real technology.

Two of the biggest names in AI came under scrutiny on September 16th in a research report from Mizuho Financial Group.

In a note titled “Delivering the AI ​​Punch,” analyst Vijay Rakesh initiated coverage on Dell Technologies (della) and the Super Micro Computer (SMCI) .

“Generative AI is driving growth and disruption in multiple markets, pushing the boundaries of innovation and productivity,” Rakesh said, referring to the type of artificial intelligence capable of generating text, images, video or other data using generative models.

“AI servers comprise the infrastructure that enables the AI ​​revolution, and we see two major server OEMs leading this future: SMCI and DELL,” he said.

Michael Dell, chairman and CEO of Dell Technologies, is riding a wave of demand for artificial intelligence.

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Analyst begins coverage on Dell and Super Micro Computer amid $406 billion opportunity

Rakesh initiated coverage on Dell with an outperform rating and a $135 price target, while giving Super Micro a neutral rating and a $450 price target.

The analyst said the market for AI servers — specialized computing systems designed to handle the demands of AI workloads — is expected to reach about $406 billion by the end of 2027, growing at a compound annual growth rate of about 54 %.

Related: Not all analysts are bullish on Super Micro Computer stock

This growth will be driven by enterprise demand and cloud service providers, including the dominant hyperscalers and slightly smaller tier 2 companies.

While the market is growing, Rakesh noted that increased competition is eating into margins.

AI server margins could squeeze further if server architectures in 2025-2026 slowly adopt liquid cooling in favor of cheaper air-cooled (AC) AI servers, and as the supply of industry GPUs or processing units graphics improve.

Liquid-cooled servers use less energy and water than air-cooled servers, but require large upfront capital investment.

Stocks of companies with diverse portfolios benefit more, especially if margins compress further if server architectures lag to adopt liquid-cooled servers and if GPU offerings improve.

AI is a secular factor, but the analyst said Dell’s diversification into computing/storage generates synergies and long-term value.

“While SMCI led the market with a lead from tight GPU supply, is losing share, with DELL quickly gaining share by leveraging relationships as the overall server market leader, we would note that peer HPE (NC) is an Enterprise/Sovereign server AI. supplier,” said Rakesh.

The analyst said he believes Super Micro is experiencing share losses, margin pressure, negative free cash flow and lax internal control issues. At the same time, it believes Dell is better positioned with a broader server/PC/storage portfolio, better balance sheet, solid free cash flow and working capital management.

Charles Liang, CEO of Super Micro Computer Inc. has a lead in the AI ​​server market, but it’s shrinking.

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Dell executive cites server demand

Dell beat Wall Street’s second-quarter earnings expectations thanks to a rise in server sales.

AI sales are within Dell’s Infrastructure Solutions Group, which makes servers and data center systems and is the company’s fastest-growing unit. Total group sales rose 38 percent to $11.65 billion, beating Wall Street’s call for $10.44 billion.

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“Our AI momentum accelerated in Q2 and we saw an increase in the number of enterprise customers purchasing AI solutions each quarter,” Jeff Clarke, vice president and chief operating officer, said in a statement. “Demand for AI-optimized servers was $3.2 billion, up 23% sequentially and up $5.8 billion year-over-year. The backlog was $3.8 billion and our pipeline has grown to several multiples of our stock.”

More recently, Dell said in a regulatory filing that it expected further job cuts. It limits outsourcing, reorganizes employees and takes “other actions to align our investments with our strategic priorities and customer needs.”

“We anticipate that these actions will result in a continued reduction in our overall workforce,” the filing said. “We believe our unique operational advantages provide a foundation to drive growth, increase efficiency and continue to position us for long-term success.”

While overall net income increased, the pricing environment became increasingly competitive, which primarily impacted the gross margin performance of the Company’s Customer Solutions group.

Dell said it expected the group to post a modest increase in net income for the full fiscal year, driven by the timing of the anticipated PC refresh cycle.

Last month, short seller Hindenburg Research published a scathing report on Super Micro, claiming it had “found glaring accounting red flags, evidence of undisclosed related party transactions, sanctions and export control failures and customer issues”.

The report says that companies such as electric vehicle maker Tesla (TSLA) and Nvidia heavy AI chip (NVDA) switching from Super Micro to Dell.

Hindenburg noted that Nvidia CEO Jensen Huang said, “No one is better at building end-to-end systems at very large scale for the enterprise than Dell.”

A day after the Hindenburg report was released, Super Micro said it would not file its annual report on SEC Form 10-K on time for the fiscal year ending June 30 and expected to file a late notice.

In early August, Super Micro Computer missed analysts’ estimates for its fiscal fourth quarter and offered mixed guidance for the current period.

Related: Veteran fund manager sees world of pain coming for stocks