Dell's AI Server Success and PC Market Recovery Drive Earnings Growth

Dell's AI Server Margins And PC Market Recovery Signal Earnings Growth, Say Analysts - Dell Technologies (NYSE:DELL)

Analysts are optimistic about Dell's AI server margins, diverse portfolio benefits, and potential PC market recovery. Dell Technologies Inc. DELL shares are trading higher after the company reported better-than-expected second-quarter financial results yesterday. Dell reported revenue of $25.03 billion, beating the consensus estimate of $24.14 billion, and adjusted earnings of $1.89 per share, beating analyst estimates of $1.71 per share, according to Benzinga Pro. In the conference call, the company stated that it expects solid top-line growth in the second half of the year. Dell expects adjusted EPS of $1.90 - $2.10 (vs. consensus of $2.20) for the third quarter and $7.55 - $8.05 (vs. street view of $7.70) for FY25. Goldman Sachs analyst Michael Ng reiterated a Buy rating with a target price of $155 (vs. $160 prior) and raised its already above-consensus FY25/26/27 EPS by 3% on average. The analyst notes that DELL's improving AI server margins should bolster its valuation multiple and mid-term growth prospects. Early signs of growth in traditional servers and storage are also promising. The analyst projects Dell's diverse portfolio to benefit from a PC market recovery, growth in ISG driven by its strong position in enterprise servers and storage, and shareholder-friendly capital returns, including 40-60% of free cash flow. Also Read: SecureWorks Stock Drops as Dell Weighs Strategic Sale Options J.P.Morgan analyst Samik Chatterjee reiterated the Overweight rating with a price target of $160. Chatterjee writes that confidence in the AI-driven compute investment cycle, which should benefit Dell's branded server companies. While other business segments face mixed macro challenges, they also see stronger growth in the ISG group, setting up Dell for double-digit earnings growth as it overcomes PC and general-purpose server pressures. The analyst also expects further gains from a higher valuation multiple tied to AI investments and a potential rebound in PCs, including AI-enhanced models. Investors can gain exposure to the stock via Innovator Deepwater Frontier Tech ETF LOUP and Return Stacked Bonds & Managed Futures ETF Roundhill Generative AI & Technology ETF CHAT. Price Action: DELL shares are up 3.2% at $114.24 at the last check Friday. Photo via Shutterstock Read Next: Jim Cramer Says Lululemon 'May Have Bottomed' After Nearly 50% Drop This Year, Strongly Confident About Dell As Stock Surges Over 3% In After-Hours Trading Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors. Market News and Data brought to you by Benzinga APIs

Dell's results ease worries that AI can't boost margins: analysts (DELL)

Dell's Infrastructure Solutions Group delivered $11.65B in revenue for the quarter, up 38% year-over-year, while EBIT margins for the segment came in at 11%, up 350 basis points sequentially. Included in that was an 80% rise in servers and networking revenue at $7.67B, well above the $5.96B estimate, which Evercore ISI analyst Amit Daryanani said was impressive. "Given the plethora of worries around DELL's ISG and AI margins, we think this performance is fairly impressive and should help allay investor fears around margin issues," Daryanani wrote in an investor note. He has an Outperform rating and $140 price target on Dell. In addition, Dell said server revenue for the period was $3.1B, up 82% sequentially and its backlog is now at $3.8B, while the pipeline has reached many multiples of its backlog. Looking to the rest of fiscal 2025, Dell said it expects revenue to be between $95.5B and $98.5B, with the mid-point of $96B slightly below the $96.37B estimate. Dell added that revenue for its Infrastructure Solutions Group should grow roughly 30%, due largely to both AI and traditional servers. Citi analyst Asiya Merchant agreed, citing the continued momentum in AI. "Results exceeded expectations with AI servers (up 82% q/q) delivering upside while ISG margins also came in better than expected as Dell was able to attach higher services to improving enterprise customer mix," Merchant wrote in an investor note. Merchant reiterated her Buy rating and raised her price target on Dell to $160 from $150. Wells Fargo analyst Aaron Rakers also reiterated his Overweight rating, pointing out that the results "notably" assuaged AI margin concerns. "Dell's significant capital return capacity remains a key tenet of our thesis," Rakers wrote in a note.

The best AI trade of the week turned out to be Dell, and Wall Street sees more gains

Dell Technologies was an unexpectedly major beneficiary of artificial intelligence tailwinds this week. Shares of Dell added 1% on Friday after the computer hardware maker topped Wall Street's quarterly estimates , with server sales surging 80% as AI momentum shows no signs of a slowdown. The stock is on track for a slight week-to-date gain. Still, that's enough to outperform the AI darling everyone was paying attention to when the week began: Nvidia. The chipmaker is down more than 8% this week after its fiscal second-quarter results showed a decline in gross margins. As for Dell, its latest quarterly figures have analysts excited for strong gains ahead. "While our ests and [price target] are unchanged post-earnings, we are encouraged by the momentum in DELL's AI server business & the improvement in [infrastructure solution group] margins, despite a lack of real inflection in traditional infrastructure demand," wrote Morgan Stanley's Erik Woodring. He has an overweight rating on Dell and a price target of $176, implying upside of 59%. Following the print, Bank of America's Wamsi Mohan lifted his price target to $155 from $150 a share, reflecting 40% upside from Thursday's close. The analyst reiterated his buy rating, citing early-stage AI adoption, margin growth and an impending AI PC upgrade cycle. Those forecasts are above the average analyst price target, which calls for upside of 36%, according to FactSet. DELL YTD mountain Dell shares this year Morgan Stanley and BofA aren't the only shops bullish on Dell. JPMorgan's Samik Chatterjee believes that Dell's ongoing focus on operating expenses and double-digit revenue opportunities within its core business create a "robust earnings growth trajectory" not currently priced into shares. "While DELL is unlikely to be perceived as a primary beneficiary of an AI investment cycle, we expect all server companies to benefit in relation to sale of higher-end servers with [average selling price] and (operating) margin upsides," he wrote. Chatterjee has an overweight rating on shares. His price target of $160 points to a 44% gain. Despite the strong AI figures, some analysts are keeping to the sidelines. Barclays analyst Tim Long retained an equal weight rating, viewing AI upside as baked into shares. AI tailwinds may also not be enough to offset weaknesses in the PC and traditional server market, he added. "AI orders and revenues have been strong for DELL, but we expect volatility and are also concerned about the target customers," Long wrote.

Dell Q2: AI Servers Will Represent 15% Of Revenue Soon; Upgrade To 'Strong Buy' (DELL)

A strategic divestiture of SecureWorks could yield $400 million for AI initiatives, aligning with Dell's focus on AI solutions. I initiated a 'Buy' rating for Dell (NYSE:DELL) in May 2024, highlighting the growth potential of AI-optimized server and networking portfolio. Dell released its Q2 result on August 29 after the bell, reporting a 79.5% year-over-year growth in Servers and Networking business. The 23% growth in AI optimized server order underscores Dell's growth potential in the AI era. I am upgrading to 'Strong Buy' with a one-year target price of $190 per share. My biggest confidence with Dell comes from the rapid growth of their AI server revenue, as depicted in the chart below. During the quarter, the AI server represented around 12.4% of total revenue, compared to 2.2% three quarters ago. Dell exited the quarter with a record backlog of $3.8 billion, which is remarkable. I anticipate Dell's AI server will continue to grow rapidly and contribute significantly to the overall topline growth in the future for the following reasons: For instance, Dell expanded their AI factory with Nvidia to include new server PowerEdge XE9680L, as well as storage, edge and workstations in May 2024. These expanded offerings can be utilized by enterprise customers across various industries. As reported by Reuters on August 29, Dell attempts to sell their 79.2% ownership in SecureWorks (SCWX). Dell previously explored the stake selling back in 2019. At this point, I think the divestiture of the cybersecurity firm makes strategic sense, as the cybersecurity market is not aligned with Dell's core server and storage portfolio. As Dell is shifting their strategic focus towards AI solutions, SecureWorks is increasingly seen as a non-core business. SecureWorks currently has a market cap of $640 million. As such, assuming Dell sells the majority of ownership at a 20% discount, Dell could potentially achieve around $400 million in cash, which can be deployed in AI initiatives. I estimate Dell's near-term growth with the following assumptions: Putting everything together, I forecast Dell will deliver 14% growth in revenue for FY24, driven by strong Servers and Networking business growth. For the normalized revenue growth from FY25 onwards, I assume Servers and Networking will grow by 20% annually; storage by 5%; client solutions by 5%. As such, the normalized revenue growth is projected to be 9.3% from FY25 onwards. As the sale of AI servers to hyperscalers carries lower gross margin, I estimate Dell will face 10bps gross margin headwinds in the near future, offset by 10bps margin improvement from SG&A operating leverage. With these assumptions, the DCF summary is as follows: The free cash flow from equity is calculated as follows: The cost of equity is calculated to be 10% assuming: risk-free rate 3.8%; beta 0.9; equity risk premium 7%. Discounting all the future FCFE, the one-year target price is calculated to be $190 per share. As reported by Bloomberg on August 5 2024, Dell plans to layoff 12,500 employees, or about 10% of the total workforce, as part of a reorganization of the sales team. Dell aims to create an AI-focused business group and eliminate some low-growth business units. The management confirmed the reorganization during the earnings, indicating the company is optimizing their sales coverage to better focus on AI starting from the second half of this year, with a projected cost of $328 million for workforce reductions. I favor the reorganization plan, as it could potentially accelerate Dell's overall revenue growth in the future. I think the rapid growth of AI server and networking will continue in the near future and gradually become a major growth driver for Dell's overall financials. The stock price is significantly undervalued, based on my model; therefore, I am upgrading to 'Strong Buy' with a one-year target price of $190 per share.