One way for investors to tap into the potential growth opportunities in artificial intelligence (AI) is to invest in companies like Dell Technologies (DELL +5.62%) that make computers and servers that enable individuals and businesses to access new AI-powered apps and services.
Dell stock has been seeing the benefits of that AI bullishness for much of the year, but shares of the computer maker fell late last month after it posted its latest earnings numbers. Is this pullback a good buying opportunity for growth investors, or is it a warning sign that Dell's stock rose too fast, too soon?
NYSE: DELL
Key Data Points
Dell's growth rate is impressive, but its margins aren't
On May 30, Dell reported its fiscal 2025 first-quarter earnings (for the quarter ending May 3). Revenue of $22.2 billion beat analyst expectations of $21.6 billion and was up 6% year over year. For Q2, Dell management forecasts revenue of between $23.5 billion and $24.5 billion (up 4.8% year over year at the midpoint of projections).
With much of the focus in the tech sector on AI and the growth opportunities it offers Dell, investors appear to be concerned about the company's margins. Demand for AI servers was strong with revenue from Dell's infrastructure solutions business growing 22% year over year and server and networking sales rising by 42%. However, the segment's overall operating income fell by 1% year over year despite all that growth.
Dell's Q1 net income rose by 65% year over year to $955 million, but that was mostly related to an income tax benefit. The company's pre-tax profit of $547% million fell 22% year over year. Analysts are concerned that the company is selling its AI servers at minimal profit, making it difficult for the bottom line to improve despite the strong top-line growth.
The company still has significant opportunities ahead
Lackluster profits aren't something investors should ignore. But with the company's AI growth still in its early innings, the market may be overreacting, especially given the potential upside that lies ahead for Dell. Besides servers, there's the potential for personal computers (PCs) to drive a lot of growth for Dell. Research and consulting firm Gartner projects that AI-equipped PCs will account for 22% of all PCs shipped this year.
The new wave of AI-powered computers can trigger a big upgrade cycle for Dell and other computer makers. Many businesses have been holding off on upgrading their PCs due to inflation and challenging economic conditions, but with new AI-powered capabilities, there may finally be a reason to justify spending on new computers. Dell's client solutions group, which includes PCs and notebooks, has been underwhelming in terms of growth (sales were flat last quarter). Once demand in the segment picks up, investors will get a better picture of Dell's financials as both segments of its business benefit from AI-driven demand.
Should you buy Dell Technologies stock?
The recent dip in price has made Dell's valuation more attractive. It's trading at 27 times earnings and a price-to-sales multiple of 1. For growth-oriented investors bullish on AI, Dell could be an underrated stock to buy. At a time when many top AI stocks trade near their highs and at sky-high valuations, Dell may offer a better-priced alternative.
Dell has multiple ways to profit from AI's growth, including its infrastructure business and the sale of AI-powered PCs. There's still much more room for Dell's business to grow, and buying the stock today could prove to be a good move down the road.
