The boom in artificial intelligence (AI) spending is unprecedented. Companies are investing billions of dollars to create data centers and other computing infrastructure in hopes of winning the AI technology wars.
Microsoft and OpenAI are reportedly set to spend $100 billion on a single supercomputer. That is a lot of money going to computing systems.
Investors have piled into the picks and shovels of the AI gold rush, like Nvidia and Super Micro Computer. But there is another AI winner that has flown under the radar: Dell Technologies (DELL +2.75%).
As hard as it may be to believe, the stodgy personal computer brand has indeed been a force in AI. The legacy technology provider has expanded its services beyond consumer devices, positioning itself to take advantage of this potential boom in data centers and cloud computing.
That potentially makes Dell Technologies a sneaky AI winner, but should you buy the stock? Let's investigate.
Dell: More than personal computers
Dell is known for its branded Windows-powered computers. They still make up a sizable portion of the business. It focuses on high-end laptops and PCs, gaming stations, and business PCs. For fiscal 2024 (ended Feb. 2), Dell's computer segment, reported under its client solutions group, generated $48.9 billion in revenue and $3.5 billion in operating income.
The segment saw a surge in growth during the pandemic, but it generated around the same amount of sales in fiscal 2024 as it did in 2020. It has produced consistent operating profits of at least $3 billion in each of the last five years too.
What's more exciting is Dell's infrastructure solutions segment, at least from an AI perspective. The segment helps AI companies assemble and build highly efficient data centers around the world. Nvidia CEO Jensen Huang even touted the company in his latest keynote, saying Dell was the premier solution for building data centers.
Its financials are not rocketing higher like Nvidia's, but Dell's infrastructure solutions segment generated $4.3 billion in operating income last year. If companies keep going to Dell to help them optimize the computing power of advanced computer chips from the likes of Nvidia, investors should see this segment's earnings grow over the next few years.
NYSE: DELL
Key Data Points
The potential and caution around AI beneficiaries
There is a lot of excitement around Dell, especially after the direct mention from Nvidia's CEO. Its stock is now up over 300% in the last five years, outperforming its computing hardware rival Apple.
Dell's infrastructure solutions segment could grow rapidly over the next few years if companies keep building more and more AI computing systems. It is one of the top brands in the space, and there are tens of billions of dollars -- perhaps hundreds of billions -- in sales to go after. It is no surprise, then, to see some people getting excited about Dell as one of the next big AI winners.
But betting on a stock just because of this hype-filled narrative is risky. Every year, there is a new story from Wall Street around what "hot" sector investors should buy. Sometimes, these are sectors that turn into sizable opportunities powering the global economy, like cloud computing.
Most of the time, what was hot one year on Wall Street becomes a sideshow the next. In just the last decade, investors have seen booms and busts in sectors like cannabis, 3D printing, and the metaverse. These were all sectors talked about as the next big thing, but most of the stocks in these sectors severely underperformed the broad market.
This is not to say AI is overhyped, but investors should tread lightly when investing in the popular trend of the day.
Data by YCharts.
Time to buy shares?
In 2022, Dell had a price-to-earnings ratio (P/E) below 8. This was dirt cheap compared to the S&P 500 market average and a key reason the stock has put up monster returns in the last few years.
But the company's underlying earnings have been volatile over the same period with fiscal 2024 earnings per share basically unchanged from 2021. That said, they are up significantly from pre-pandemic levels.
Most of the stock's rise has thus come from multiple expansion. Its P/E ratio is now 27, which is right around the S&P 500 average.
Buying the stock at a P/E of 27 implies an expectation the company sees strong earnings results in the next few years and fulfills the narrative that it is an AI beneficiary through consistent financial growth. So far, it's hard to see proof of this, while its competitors like Nvidia and Super Micro Computer are seeing their revenue and earnings rocket higher.
If Dell Technologies can push earnings higher, the stock can still be a deal after its recent run-up. But if the bottom line remains stagnant or even declines, it is hard to see the stock sustaining its current momentum.
