Mizuho Initiates Coverage on Dell and Super Micro Computer, Highlighting AI Potential

Here's How Mizuho Analysts See the AI Opportunity for Two Tech Stocks

Dell Technologies (DELL) and Super Micro Computer (SMCI), or Supermicro, stand to benefit from soaring demand for generative artificial intelligence (AI) servers, according to Mizuho analysts. The firm's analysts started coverage of both companies, giving Dell an Outperform rating and a price target of $135 while listing Supermicro as Neutral with a price target of $450. Both targets were below the Wall Street mean as calculated by Visible Alpha. Dell's shares rose in recent trading, while Super Micro's edged lower. In a note to clients, Mizuho said that generative AI "is igniting growth and disruption across multiple markets, pushing the frontiers of innovation and productivity." AI servers make up the infrastructure enabling the AI revolution, the note said, and that they see Dell and Supermicro as the "two major server OEMs spearheading this future." The analysts added that generative AI will expand exponentially, "supporting secular growth in the AI server market." However, they note that companies in the sector face profitability risks from "low differentiation, a concentrated customer base, and increasing competition." Both companies' shares are up more than 50% this year so far.

Mizuho initiates coverage on Dell, SMCI amid AI boom By Investing.com

Investing.com -- Mizuho Securities in a note dated Monday have initiated coverage on two major players in the AI server market, namely Dell Technologies (NYSE:DELL) and Super Micro Computer, Inc., (NASDAQ:SMCI) citing the growing potential of the AI server industry, which is projected to reach $406 billion by 2027. The analysts project a compound annual growth rate of 54% for AI servers from 2023 to 2027, far outpacing the 7% CAGR of traditional compute servers. Mizuho has given Dell an "outperform" rating, with a price target of $135, reflecting a 14.3x price-to-earnings (P/E) multiple. Dell is well-positioned to capitalize on the rapid growth of AI servers due to its diversified portfolio of PCs, storage solutions, and servers. "We estimate C24E DELL AI Server revenues at ~$10-11B (vs 2023E at ~ $800M and compared to SMCI at ~$20B) and ramping up significantly into 2024E," the analysts said. Key to Dell's advantage is its broad product portfolio and strong customer relationships. The company leads the global server market, holding 13% market share as of 2023. Its balanced offering across PCs, storage, and servers allows Dell to leverage AI server growth while maintaining stability in other sectors, such as enterprise storage and PC markets, both of which are projected to grow at 5% and 3% to 4% CAGR, respectively, from 2023 to 2027. Dell's strengths are further reinforced by its strong supply chain and strong free cash flow. The company benefits from favorable supplier payment terms and negative working capital, allowing for better cash flow management compared to competitors. SMCI, a market leader in AI servers with 70-80% market share in 2023, is facing increased competition and internal challenges. Mizuho has give the stock a "neutral" rating for SMCI, with a price target of $450, reflecting a 10x P/E multiple. While SMCI is a leader in AI server development, its market share is projected to decline to 40-50% by 2024, as competitors like Dell ramp up their AI server offerings. Despite the company's dominant position in the AI server market, with 70% of its revenues stemming from AI-related products, "It is seeing share loss, margin pressure, negative FCF, and lax internal control issues (10-K delays)," the analysts said. Additionally, SMCI's negative free cash flow (FCF), driven by high working capital needs, is a key concern. The company has raised $4.8 billion in capital to support its growth, but this has led to increased debt and equity dilution. SMCI's high exposure to startups and increasing competition from silicon merchants like Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) also pose risks to its market position.

Mizuho sets Dell stock to outperform with $135 target By Investing.com

On Monday, Mizuho initiated coverage on Dell Technologies Inc. (NYSE:DELL) with an Outperform rating and a price target of $135. The move comes as generative AI is seen as a key driver of growth and innovation across various markets, leading to an increased demand for AI servers, which are essential for this technological revolution. According to the analyst from Mizuho, the AI server market is expected to reach approximately $406 billion by the year 2027, expanding at a compound annual growth rate (CAGR) of around 54%. This growth is attributed to the demand from Cloud Service Providers (CSPs), including Hyperscale and Tier 2, as well as enterprise demand. The coverage highlights that while the AI server market is experiencing exponential growth, there are profitability risks due to factors such as low differentiation, a concentrated customer base, and rising competition. Super Micro Computer, Inc. (NASDAQ:SMCI) is recognized as the current market leader in AI servers but is experiencing challenges including share loss, margin pressure, negative free cash flow (FCF), and internal control issues, as evidenced by delays in their 10-K filings. In contrast, Dell is viewed as better positioned to capitalize on market opportunities due to its diverse portfolio, which includes servers, PCs, and storage solutions. The company also boasts a stronger balance sheet with robust free cash flow and effective working capital management. While initiating coverage on Dell with a positive outlook, Mizuho has simultaneously assigned a Neutral rating to Super Micro Computer, Inc. with a price target of $450. The contrasting ratings reflect the differing prospects and positions of the two companies within the rapidly growing AI server market. In other recent news, Dell Technologies has been the focus of several key developments. The company reported robust growth in its core businesses during its recent earnings call, with the Client Solutions Group and Infrastructure Solutions Group growing 12% and 38% respectively. Dell is also expanding its presence in the artificial intelligence (AI) market, boasting a $3.8 billion backlog in the AI space. Susquehanna initiated coverage on Dell, issuing a Neutral rating and a price target of $120.00. The firm noted Dell's large scale, recognized brand, and strong internal financing capabilities as key advantages, but expressed concerns about the uncertain economic returns of AI hardware and Dell's strategy for scaling its AI services. Meanwhile, Evercore ISI maintained a positive outlook on Dell, reiterating an Outperform rating with a $140.00 price target, despite expected gross margin headwinds from a greater mix of AI servers and inflationary component costs. As Dell Technologies Inc. (NYSE:DELL) positions itself to leverage the burgeoning AI server market, real-time data from InvestingPro underscores the company's financial health and market performance. Dell's market capitalization stands at a robust $81.06 billion, reflecting investor confidence in its business model. Furthermore, the company's P/E ratio, a key indicator of market expectations of growth, is attractively priced at 20.58. This suggests that Dell's earnings could be undervalued relative to its near-term growth potential, as emphasized by an even lower adjusted P/E ratio for the last twelve months as of Q1 2023 at 17.99. InvestingPro Tips highlight that Dell's management has been actively buying back shares, signaling a strong belief in the company's value proposition. Moreover, Dell offers a high shareholder yield, which could be appealing to investors seeking returns through both dividends and share repurchases. These strategic moves are particularly relevant as the company navigates the competitive AI server market landscape. Investors can find an additional 16 InvestingPro Tips, offering deeper insights into Dell's financial metrics and market trends, which can be accessed on the InvestingPro platform at https://www.investing.com/pro/DELL. With analysts revising their earnings expectations downwards for the upcoming period, it is crucial for investors to keep a close eye on Dell's financial performance. Nonetheless, Dell's significant return over the last week and the prediction of profitability this year by analysts could indicate potential for short-term gains. These insights, derived from InvestingPro, provide a comprehensive view of Dell's market position and future outlook, which is essential for informed investment decisions.

Dell: AI Growth Inflection Is Just Beginning (NYSE:DELL)

Looking for a helping hand in the market? Members of Ultimate Growth Investing get exclusive ideas and guidance to navigate any climate. Learn More " Dell Technologies Inc. (NYSE:DELL) investors have avoided a further battering as DELL's August 2024 lows held firmly. As a result, dip-buyers have returned to lift the stock's buying momentum, even as arch-rival Super Micro (SMCI) stock suffers to gain traction. Therefore, the valuation between SMCI and DELL has closed markedly, narrowing the previous valuation bifurcation between the leading competitors in the AI server infrastructure market. Coupled with Super Micro's recent 10K filing delays, DELL's relative outperformance against SMCI has been nothing short of breathtaking. In my previous bullish update on Dell, I indicated why the company's AI growth inflection looks promising. I also highlighted that the company is well-positioned in the AI server market, following the strong read from Super Micro's earnings release. As a result, DELL has outperformed SMCI since February 2024, although its valuation is still assessed to be relatively attractive. Moreover, its well-diversified ISG portfolio has helped to mitigate the margin pressure it faces in the increasingly competitive AI-optimized servers business. Accordingly, Dell has continued to gain market share as it seeks to outmaneuver its rivals in the enterprise and SMB space. In addition, Dell has also been making solid progress with tier-2 cloud service providers, underscoring its competitiveness. As a result, Dell has been able to mitigate the near-term profitability impact in its ISG business as it scales, bolstered further by its core "traditional" server business. Accordingly, Dell indicated that the company has observed a growth inflection in enterprise demand in its core server business, suggesting the weakness in enterprise demand has likely reached a nadir. Moreover, the continued strength in Dell's nascent AI business should underpin the company's ability to sustain its profitability growth inflection, potentially avoiding the significant profitability impact observed in SMCI's thesis. I assess that I have understated Dell's bullish proposition in its core server business. I was concerned whether the maturing opportunities in its "traditional" business could hamper a potentially more robust growth cadence in its AI server business. Notwithstanding my caution, Dell demonstrated its ability to deliver a growing backlog that reached $3.8B in its fiscal second quarter. Moreover, management emphasized that it recorded $3.2B in AI server orders "driven by tier-2 CSPs." Hence, I assess that despite the unanticipated delays in the shipment of Nvidia's (NVDA) Blackwell chips, Dell's more robust enterprise base has proved its mettle. Moreover, management is confident that the growing adoption in its enterprise base is still in the early stages. Therefore, despite the growth rates for hyperscaler demand potentially slowing through 2026, Dell's ability to transition its current enterprise customers to its AI-optimized portfolio shouldn't be understated. As a result, the company should demonstrate its ability to lift its AI-related margins as it faces off with Super Micro in the AI business. Moreover, investors shouldn't ignore Dell's opportunities to target the "aging installed base" of its core server business. The need to drive higher efficiencies as enterprise customers invest in AI has spurred an impetus to initiate earlier hardware refresh cycles. Therefore, Dell is well-primed to benefit from the refresh cycles in core server infrastructure while positioning itself to gain more share against SMCI in AI server opportunities. I assess that the market seems increasingly confident in Dell's capabilities to overcome its past tepid growth rates as it capitalizes on the core server refresh and growing AI backlog. In addition, Dell's ability to pay a forward dividend yield above its sector median underscores management's confidence in its capital allocation strategies. Given its more well-diversified portfolio, this should underpin the market's confidence that Dell could experience less profitability volatility than SMCI posted. Wall Street's estimates on Dell have also been lifted, boosting the company's bullish proposition and potentially improving buying sentiments. DELL's price action suggests dip-buyers returned aggressively to help the stock bottom out in August. Its "B+" momentum grade corroborates my confidence in its ability to regain its uptrend bias, suggesting its August lows should hold decisively. Moreover, its relatively attractive valuation suggests the stock isn't overvalued. DELL's forward adjusted PEG ratio of 1.17 is more than 35% below its sector median. Hence, I assess that the market has already reflected significant execution risks in its AI growth prospects as the company seeks to unhinge SMCI's market leadership. In addition, the market could also be worried about Dell's transition risks from its core server business, potentially diluting its profitability margins further. Notwithstanding my caution, I have determined that the risk/reward on DELL still seems favorable. Rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified. Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? 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