What a year for Dell Technologies (DELL -1.50%). Last June, shares of the computer maker were at a 52-week low of $48.74. Since then, the stock has more than tripled, reaching a 52-week high of $179.70 on May 29.
Dell's outsized stock performance was thanks to the immense demand for artificial intelligence hardware. The company sells PCs, computer servers, and other IT infrastructure products designed for AI.
But its share price dropped after Dell announced results for its fiscal first quarter, ended May 3. Does this create a buying opportunity? Or are there reasons to avoid the stock? Here's a look into the company to answer these questions.
Dell's strengths and weaknesses
Dell's stock fell after earnings because its gross margin declined 250 basis points in Q1. Not only that, the firm expects gross margin to drop around 150 basis points in its 2025 fiscal year. Management blamed inflation and competitive pressures for the margin erosion.
But that doesn't mean gross margin can't improve over time. Historically, this metric has gone up and down for Dell over the years.
And gross margin is just one part of the investment picture. Overall, Dell's fiscal Q1 results were good. Revenue rose 6% year over year to $22.2 billion. At the heart of its rising sales was Dell's IT infrastructure business.
This division delivered 22% year-over-year revenue growth in Q1, reaching $9.2 billion. In fact, this business has expanded to represent over 40% of Dell's sales, up from 36% a year ago.
The division's growth is thanks to the company's success in selling hardware capable of handling the demands of AI technology. Dell claims to possess the largest portfolio of AI-enabled hardware.
Adding to this strength is Dell's supply chain. The company has built relationships with multiple vendors to ensure the availability of components for the hardware it sells. For example, it sources semiconductor chips from multiple vendors, such as Nvidia and AMD.
Other factors to consider with Dell stock
Dell anticipates sales of its AI-optimized products will continue to drive sales growth for the year. According to COO Jeff Clarke, "We've seen an expansion in the number of enterprise customers buying AI solutions which remains a significant opportunity for us given we are in the early stages of AI adoption."
As a result, Dell forecasted its 2025 fiscal year will see sales growth of at least $93.5 billion compared to $88.4 billion in fiscal 2024. A revenue rebound helps this growth in the company's flagship PC division, which had suffered a cyclical downturn in the previous fiscal year.
In Q1, PC sales reached $12 billion, essentially flat from the prior year. This was an improvement from the division's sales softness experienced in Dell's 2024 fiscal year, ended Feb. 2, when revenue dropped 16% year over year. Consequently, Dell's PC sales may have turned a corner in Q1.
Another consideration when evaluating Dell stock is its dividends. The company raised its annual dividend payout 20% in February to $1.78 per share. Dell committed to raising its dividend annually by at least 10% through its 2028 fiscal year.
Dell can afford to do this because of its strong free cash flow (FCF). The company generated FCF of $5.5 billion over the trailing 12 months. Its Q1 FCF of $623 million easily covered the quarter's dividend payments of $336 million.
To buy or not to buy Dell shares
Dell's expanding infrastructure business, commitment to dividend growth, and strong FCF are reasons to consider an investment. In the last year, despite softness in its PC business, Dell grew its diluted earnings per share (EPS) by 67% from $0.79 to $1.32.
These factors contribute to why Wall Street analysts believe Dell stock has upside. The consensus among these analysts is an overweight rating with a median share price of $162.
Right now, Dell is doing well. For investors holding the stock over the long run, the potential upside in share price as the company's PC business recovers, coupled with a solid dividend, makes Dell a worthwhile long-term investment.
