Computer system builder Dell (NYSE:DELL) is enjoying a golden age. The company now builds a lot of servers to train or run artificial intelligence (AI) systems, and its stock has skyrocketed since the ChatGPT boom began.
Dell shares have risen 127% over the past two years, nowhere near the 430% rise seen by the leading AI chipmaker. NVIDIA (NASDAQ: NVDA) published in the same period and is even further behind other AI system builders Super-microcomputer‘S (NASDAQ:SMCI) 932% profit.
Yet Dell stock has more than doubled in value in two years. Is it too late to jump on the bandwagon and buy Dell stock today?
Dell in numbers
The AI boom has slowed in recent months. Nvidia stock has fallen 26 percent since its all-time high in June, and Super Micro has fallen 49 percent since its peak in early March. Dell followed the same trend, suffering a 45 percent loss over the past two months.
Dell’s high was short-lived, however. Excited investors drove the stock price up 51 percent in the four weeks before the release of its first-quarter results.
When the report hit news outlets, management’s forecast for fiscal 2025 was underwhelming. Dell expects revenue growth of about 8% year-over-year this year, after a 14% decline in the prior-year figure. While that was above analysts’ consensus forecast of about 7% growth, it wasn’t the AI-driven triumph that the most optimistic Dell investors wanted to see.
So the stock fell 20% the next day and continued to slide for weeks. As of early August, Dell shares are trading at modest valuation multiples, such as 19.6 times earnings or 0.76 times sales. These low ratios make the stock look like a bargain next to rising AI stocks like Nvidia and Super Micro:
|
AI share |
P/E |
P/S ratio |
P/FCF ratio |
Market capitalization |
1-year share price gain |
|---|---|---|---|---|---|
|
Dell |
19.6 |
0.76 |
12.8 |
67.9 billion US dollars |
81.2% |
|
Super Micro |
33.7 |
2.97 |
N/A |
35.1 billion US dollars |
79.5% |
|
NVIDIA |
59.8 |
31.5 |
64.0 |
2.52 trillion US dollars |
131% |
Data source: Finviz.com as of August 6, 2024. FCF = free cash flow. Table by author.
Is Dell a bargain or a problem company?
So Dell is trading at a much lower valuation multiple than its leading AI industry peers. Does the company deserve more generous market treatment?
At least part of the success of Dell’s AI systems appears to be due to discounts. As with Super Micro, Dell’s gross profit margin is declining, according to recent reports. A price war could be brewing in the AI systems market. Dell CFO Yvonne McGill spoke of a “more competitive pricing environment” in the first quarter earnings call.
Tomay-to, Tomah-to. Same thing, different name.
So Dell is in a big AI market, but profit margins are shrinking in this explosively growing sector. At the same time, Dell’s management is forecasting lower revenue growth than Super Micro. Rapid growth is the way to achieve horrendous valuations, and Dell is not in that race.
To buy Dell or not to buy, that is the question
Ultimately, I’m tempted to buy some Dell shares while they’re cheap. Not every AI stock needs to hope for stellar growth, and there’s room for solid value picks in this booming market trend.
However, Dell is not a picture-perfect investment either. The company just announced a major restructuring of its sales team, involving an undisclosed number of job cuts, to cut costs and refocus on AI opportunities. Management is presenting this project as a growth-oriented “leaner and more efficient” strategy, but cost-cutting programs always come with a hint of desperation.
Therefore, I’m not exactly excited about Dell as an investment opportunity right now. The low valuation comes with modest growth plans and signs of deep-rooted strategy problems. A small investment could make sense as a speculative bet on better days and stronger long-term AI growth, but you should take it slow with this stock.
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Anders Bylund holds a position in Nvidia. The Motley Fool holds a position in Nvidia and recommends it. The Motley Fool has a disclosure policy.
Is It Too Late to Buy Dell Stock? was originally published by The Motley Fool
