Is Dell Stock the Best Buy in the AI Server Space?

Tech (Ecommerce, Social Media, etc.) - shutterstock_611605280

As artificial intelligence (AI) continues to take the investing world by storm, the AI server space is one fast-growing area that investors can look into for potential winners. As acceptance and integration of AI gathers momentum in various industries, the supporting infrastructure to maintain these huge AI algorithms and platforms will also increase. This is where the AI server market comes into play.

Projected to reach a market size of $177.4 billion by 2032, the AI server space is forecast to expand at a CAGR of 18% along the way. With a ready and growing market available, AI server stocks are poised for significant upside.

To that end, brokerage firm Morgan Stanley (MS) has picked Dell (DELL), the tech industry giant, as its top bet that can benefit from this megatrend. 

About Dell Stock

Founded in 1984 by Michael Dell, who was then still a student at the University of Texas, Dell Technologies (DELL) has gone on to become one of the world's largest technology infrastructure companies. The company designs, develops, manufactures, and sells a wide range of computer-related products and services. This includes PCs, servers, data storage devices, and networking equipment, among others. It currently commands a market cap of $106.73 billion.

Up a whopping 91.3% on a YTD basis, Dell stock also offers a competitive dividend yield of 1.19%. Recently, the company also raised its quarterly dividends to $0.45 per share. Moreover, its modest payout ratio of 21.8% leaves it enough scope for further growing its dividends in the future.

Is Dell a Good Value Stock?

Morgan Stanley's bullish opinion about Dell is primarily due to momentum in the company's AI business, as well as its attractive valuation. 

The broker remarked that "DELL trades at just 13x our new FY26 EPS of $10.12 (18% above Street) & remains the best way to play 1) building AI server momentum, 2) inflecting storage demand, and 3) an improving PC mkt."

Sure enough, despite its searing rally in 2024, Dell stock continues to trade at a discount. Priced at 19.60x forward earnings and 1.13x forward sales, DELL looks like a relative bargain compared to the tech sector median valuations of 24.22x earnings and 2.88x sales.

So, what else is making Dell stock tick, and what are its fundamentals telling us about its prospects from here? Let's take a closer look.

Dell Beats on Q4 Earnings

Dell's revenue and earnings both surpassed expectations in the latest quarter, even as revenue declined from the year-ago period. Revenues for the fiscal fourth quarter of 2024 came in at $22.3 billion, down 11% from the previous year. Adjusted EPS increased 22.2% to $2.20, which topped the consensus estimate for $1.73. Notably, this represents the fifth consecutive quarterly earnings beat reported by Dell.

Management said, “Our strong AI-optimized server momentum continues, with orders increasing nearly 40% sequentially and backlog nearly doubling, exiting our fiscal year at $2.9 billion." In the fourth quarter, the servers and networking segment reported revenues of $4.9 billion while storage revenue was $4.7 billion, the combination forming close to 42% of the total quarterly revenues. 

Dell exited Q4 with a cash balance of $7.36 billion, compared to its short-term debt levels of about $7 billion. Moreover, in the fourth quarter, the company's cash flow from operations was $1.53 billion, with a free cash flow of $806 million.

Both operating and net margins also improved for Dell in the fourth quarter. While operating margins rose to 9.6% from 8.7% in the year-ago period, net margins came in at 7.2%, compared to 5.3% in the prior year.

Looking ahead, Dell's next quarterly report is slated for next Thursday, May 30, after the closing bell.

How Dell Benefits from AI Tailwinds

With a slowdown in the overall PC market globally, Dell's gradual shift to the AI server market bodes well for the company. Dell already holds a substantial 15.6% share in the AI server market, which is projected to increase to 16.7% in the coming years.

Data storage is also an essential component of AI algorithms and platforms. Within this niche, Dell's PowerScale offering is a formidable player. The PowerScale is a line of scale-out NAS (Network Attached Storage) storage systems focused on algorithmic trading, AI, and machine learning. Dell's PowerScale F900 offers up to 186 PB (equivalent to 186,000 TB) per cluster, second in the field only to a rival offering from IBM (IBM).

Finally, in its flagship PC business, Dell is adding a dash of AI. Dell's stellar track record of manufacturing PCs for decades gives it a certain competitive edge in the AI PC space, which is projected for steady growth in the years ahead - and Dell already stands at No. 2 among the top 5 PC makers at 27.4% of AI PCs sold.

Analysts Say Dell Stock Is a Strong Buy

Overall, analysts have a consensus rating of “Strong Buy” for the stock. Out of 15 analysts covering the stock, 11 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 1 has a “Hold” rating and 1 has a “Strong Sell” rating.

However, thanks to its tremendous rally, Dell is already trading well above its mean target price of $117.67. The Street-high price target of $152, newly set by Morgan Stanley in last week's bullish note, is about 4% overhead.

With Wall Street already pricing in a robust AI-fueled 2025 after the Q4 results, investors who like the long-term outlook for DELL may want to play it safe and wait to buy shares on any potential pullbacks, given the stock's stellar run higher so far in 2024.

On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.