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Can Dell become the next $100 billion chip stock as AI sales surge?

Published 03/01/2024, 08:31 AM
Updated 03/01/2024, 08:31 AM
© Reuters.

Shares of Dell Technologies (NYSE:DELL) soared 24% in premarket trading Friday after the technology solutions provider released better-than-expected Q4 results amid “strong AI-optimized server momentum.” Dell stock is already up 26.5% since the start of 2024, outperforming the broader S&P 500 which gained 7.5% during that period.

Dell Q4 earnings

For the quarter ending February 2, Dell surpassed analyst expectations with adjusted earnings per share (EPS) of $2.20 on revenue of $22.32 billion. Analysts had forecast EPS of $1.73 on revenue of $22.16 billion.

The company experienced significant growth in its Infrastructure Solutions Group (ISG), which focuses on AI servers, reporting a 10% sequential increase in revenue to $9.33 billion. Year-over-year, revenue for this segment was down 6%.

“Our strong AI-optimized server momentum continues, with orders increasing nearly 40% sequentially and backlog nearly doubling, exiting our fiscal year at $2.9 billion,” Dell’s Chief Operating Officer Jeff Clarke said in the release.

Conversely, Dell's Client Solutions Group, encompassing the PC business, saw a 12% year-on-year decline in revenue, amounting to $11.72 billion in the fourth quarter.

The revenue from servers and networking, primarily driven by AI-optimized servers, was $4.9 billion, while storage revenue stood at $4.5 billion.

Moreover, the Texas-based tech company also announced a 20% increase in its annual dividend to $1.78 per share.

Looking ahead to the first quarter, Dell anticipates revenue to be between $21 billion and $22 billion, as stated during its quarterly earnings call with investors. 

It feels optimistic about the potential for growth driven by AI technology for fiscal 2025 but also noted caution among some customers due to the current macroeconomic climate and concerns over infrastructure costs.

Dell’s AI offering

Best known for its PC business, Dell stock has caught the attention of investors in the past year because of a surge in demand for its powerful servers designed to handle AI workloads.

This strong interest continued during the fourth quarter, with Dell highlighting its flagship PowerEdge XE9680 as the fastest-ramping solution in the company's history.

The company disclosed that it shipped $800 million worth of AI-optimized servers, with its backlog nearly doubling on a sequential basis. 

Despite demand still outstripping GPU supply, Dell noted improvements in H100 lead times. 

Furthermore, there's significant interest in orders for AI-optimized servers that are equipped with the next generation of AI GPUs, including Nvidia’s (NASDAQ: NVDA) H200 and AMD’s (NASDAQ: AMD (NASDAQ:AMD)) MI300X.

Analysts discuss Dell stock performance

In the aftermath of the report, Morgan Stanley analysts maintained a Top Pick rating for Dell stock and raised the 12-month target price from $100 to $128.

“Our prior bull case becomes our new base case, as AI server orders/backlog/pipeline are tracking well ahead of our prior expectations, and directionally closer to our bullish supply chain checks,” they said in a note. 

The investment giant said the company’s comments on its AI server business were a highlight from the report, with the company reporting a near doubling of its backlog on a quarterly basis.

These indicators reinforce our positive outlook on the AI server supply chain and “that DELL is a clear leader in the $72B AI hardware and services market,” analysts wrote.

“Mgmt noted that AI server demand continues to outpace supply, which is a dynamic it expects to continue into next year”

“Looking forward, we still believe that the AI server opportunity is in its early days, especially for a more enterprise-focused vendor such as DELL,” they said, adding that the company’s ability to quickly supply high-end server models featuring accelerators from various silicon providers “gives the company a competitive advantage few can currently deliver.”

Voicing a similarly bullish sentiment, Goldman Sachs analysts said Dell stock “should trade higher on the stronger-than-expected AI server backlog and ISG margins,” strengthening the bank’s bull case for more earnings power and secular growth amid strong AI demand.

By Vahid Karaahmetovic

Latest comments

Every company just add AI to their product line 😉
With manipulative earning forecast why not......
So here we are again. Producing hardware says nothing about a.i. software that increases a company's bottom line. More hype.
it's seems good for me
yes i Thing.
No
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