Dell stock stuck in a bear market amid AI server boom

Dell Technologies is a technology company that manufactures computers, servers, storage, and networking equipment. Started in 1984 by Michael Dell, the company has grown to become a global company worth over $85 billion.

Dell is one of the biggest manufacturers of computers, where it competes with the likes of HP Inc., Lenovo, Apple, Asus, and Acer. In addition, it has also become a leading player in the artificial intelligence (AI) industry, where it offers data center products. 

Dell’s business has stagnated in the past few years because of the unprecedented demand it experienced during the Covid-19 pandemic. At the time, its revenue jumped and peaked at $102 billion. 

In the last financial year, its revenue came in at $88.4 billion while its net profit was over $3.2 billion. The company also completed its sale of Vmware to Broadcom in a $64 billion that helped it reduce its long-term debt to $17 billion from $40 billion a few years ago. 

Dell stock was trading at $106 on Wednesday while its HypeIndex figure soared to 170%.

Positive hype

• Dell has generated positive hype because investors anticipate that artificial intelligence spending will continue. Goldman Sachs analysts expect that the industry will see a $1 trillion investment in the coming years. Dell will benefit from all this because it is one of the biggest suppliers of data center hardware.

• Dell is also benefiting from the ongoing growth of PC sales globally. According to Gartner, PC shipments rose by 1.9% in the second quarter, with Lenovo, HP, and Dell leading the market share. 

• Gartner also expects that worldwide IT spending will continue growing this year. It sees total spending rising by 7.5% to over $5.26 trillion. This growth will be driven by data center solutions, IT services, and software. 

• The company published strong financial results, that showed that its second quarter revenue rose by 9% to $25 billion. 

• This revenue growth was driven by infrastructure revenue of over $11.6 billion, up by 38% from the same period in 2023. Client solutions had $12.4 billion in sales, a 4% drop because of its commercial division figures. 

• Analysts expect that Dell’s revenue will be over $98 billion in 2024, up by 10.4% from 2023. Dell has a long record of beating analysts estimates, meaning that its results will likely be better than expected.

• The average Dell stock forecast by analysts is $147, higher than the current $106. The increased optimism is because of generative AI and its improved margins. Its gross margins rose to 22.50% while its net income margin rose slightly to 9.47%. These margins will likely grow as it continues cutting workers. 

• Dell also trades at a big discount to peers and the broader market. It has a P/E ratio of 18, lower than the sector median of 27. 

Negative hype

• Some analysts note that Dell Technologies will face more competition from companies like HP Enterprise in the data center industry. 

• The other concern is that AI spending will ultimately slowdown in the coming years, meaning that the company could suffer from high inventory levels. 

• The PC industry tends to be highly cyclical, meaning that the current growth may lead to a downturn in the next few years.

Summary on Dell stock

AI companies have become highly expensive. On Tuesday, we wrote about Marvell Technologies, a company that is no longer growing but one with some of the highest multiples in the sector. Other names like Palantir Technologies and Nvidia spot substantial valuations.

Dell, on the other hand, seems like it is fairly valued with forward P/E ratios that are smaller than the broader market. The company has also raised its forward guidance as its AI servers demand continue rising.

The risk, however, is that the stock remains in a deep bear market, down by over 40% from its highest level this year. It has dropped below the 200-day and 50-day moving averages, meaning that it will likely form a death cross as the 200-day and 50-day moving averages make a bearish crossover.

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