Investors looking for a hot AI stock that's reasonably priced right now should take a closer look at this company, as it looks set for further upside.
The spread of artificial intelligence (AI) has given many companies' shares a big lift over the past year or so, and Dell Technologies (DELL 4.30%) is one of them. Shares of Dell have more than tripled in the past year as investors have been buying the stock on the belief that it could benefit greatly from the growing adoption of AI.
This is not surprising, as Dell can take advantage of two lucrative AI-related growth opportunities – servers and personal computers (PCs). And recent developments suggest that the company is taking steps to benefit both these markets. Let's take a closer look at the reasons why Dell's red-hot stock market rally could continue thanks to AI.
The growing demand for AI servers is giving Dell Technologies a good boost.
When Dell reported its fiscal 2024 fourth-quarter results (for the three months ended Feb. 2), management pointed out that it was seeing strong demand for its AI-optimized servers. More specifically, orders for Dell's AI-focused servers were up 40 percent quarter-on-quarter. As a result, Dell's AI servers order backlog nearly doubled from the previous quarter to $2.9 billion.
The company shipped $800 million worth of AI servers in fiscal Q4, and its solid backlog indicates that figure could remain high in future quarters. More importantly, Dell is just scratching the surface of the massive growth opportunity in AI servers, as the market is expected to reach $33 billion in revenue by 2024, according to market research firm IDC.
Another estimate by contract electronics manufacturer Foxconn pegs the AI server market at $150 billion in 2027. As such, it wouldn't be surprising to see demand for Dell's AI servers increase in the long run, especially considering that it has been improving its offerings for Nvidia.
Dell recently announced that it has expanded its partnership with AI chip leader Nvidia to offer server solutions optimized for the latter's next-generation Blackwell AI graphics processing units (GPUs). It's worth noting that Dell is offering liquid-cooled servers to mount Nvidia's Blackwell processors. That's a great thing considering that the market for liquid-cooled data centers is predicted to grow at about 25 percent annually over the next decade.
It's worth noting that demand for Nvidia's upcoming Blackwell AI chips is expected to remain extremely healthy in 2025. KeyBanc's John Winn estimates that Nvidia's data center revenue could total $200 billion in 2025 thanks to Blackwell processors. That's a huge increase from $47.5 billion last year.
So Dell Blackwell is doing the right thing by bringing AI-focused server solutions to market, as it should be able to meet the huge demand for Nvidia's chips. More importantly, the long-term opportunity in the AI server market bodes well for Dell, as it is among the leading players in the market.
The PC business seems set to change.
Soft demand for PCs over the past two years has weighed on Dell's financial performance. Its revenue fell 14 percent year-on-year to $88.4 billion in the last fiscal year. The company's revenue from Client Solutions Group (CSG), which includes sales of commercial and consumer PCs, fell 16 percent year-over-year to $48.9 billion in fiscal 2024.
This was not surprising as PC shipments were down 14% in 2023, according to IDC. However, the arrival of AI-powered PCs is likely to change this market for Dell, as it is the third largest seller of PCs, with a market share of just over 15%. According to market research firm Canalys, AI PC shipments are predicted to grow at an impressive annual rate of 44% through 2028.
Dell has its sights set on this market, and recently announced a new portfolio of PCs with on-device AI features, such as allowing users to create images natively with text inputs. giving, “Translate any live or pre-recorded audio from 44. languages into English”, and use AI to upscale the resolution of games and videos in real-time for a more immersive experience.
Dell “remains bullish on the upcoming PC refresh cycle and the long-term impact of AI on the PC market,” and its product development initiatives allow the company to explore this opportunity and expand its CSG business. should get a chance to get out of this crisis. .
Buying stocks is not wise at this time.
In fiscal 2024, Dell's earnings fell 6 percent to $7.13 a share. However, analysts are expecting its bottom line to return to growth in the current financial year, followed by healthy growth in the next few financial years.
DELL EPS estimates for current fiscal year data via YCharts
Also, as the chart above tells us, analysts are raising their revenue growth expectations from Dell. With the stock now trading at 20 times forward earnings, which is a discount to the Nasdaq-100's forward earnings multiple of 27 (using the index as a proxy for tech stocks), investors are currently bullish on this AI stock. Getting a good deal. Despite the outstanding gains it has delivered over the past year.
Buying the deal at this valuation seems like a smart thing to do in light of the potential growth that AI could drive for the company, as the market may continue to reward the stock with more gains than expected. It is expected to deliver given the rapid growth of the bottom line.