Dell Technologies (DELL) has been among the best-performing stocks in the last five years. The tech stock has returned close to 400% to shareholders since August 2019, easily outpacing the broader market's returns.
Despite these outsized gains, Dell stock is currently down 38% from its all-time highs set in May, allowing you to buy the dip.
Valued at $78.9 billion by market cap, Dell Technologies operates through two business segments - ISG and CSG.
The Infrastructure Solutions Group (ISG) provides modern and traditional storage solutions, including hyper-converged infrastructure and artificial intelligence (AI)-optimized servers. Dell is now among the largest vendors of AI servers, which have generated high demand as companies continue to invest in generative AI platforms such as ChatGPT. This segment of the business also offers networking products and services, including wide-area network infrastructure, data centers, and edge networking switches.
The Client Solutions Group (CSG) arm of the business provides desktops, workstations, notebooks, webcams, and other devices, including third-party peripherals. Moreover, it provides tech-driven security solutions to prevent security breaches.
Dell's Strong Q1
In fiscal Q1 of 2025 (ended in April), Dell reported revenue of $22.24 billion and adjusted earnings of $1.27 per share. Comparatively, analysts forecast sales at $21.64 billion and earnings at $1.26 per share in the April quarter. Given midpoint forecasts, Dell's management expects Q2 earnings, due out at the end of August, to be $1.65 per share and revenue to be $24 billion.
In Q1, Dell reported net income of $955 million, up from $578 million in the year-ago period, while sales were up 6% annually. Its data center sales, which are part of the Infrastructure Solutions Group, rose by 22% annually to $9.2 billion.
Dell emphasized that its server business grew by 42% to $5.5 billion due to strong demand. However, the business's operating profit was flat, which underlined concerns that its AI servers were sold at “near-zero margins,” as Bernstein described it.
The hardware maker said that sales from its AI-optimized server orders were close to $2.6 billion. Alternatively, revenue from the CSG business was flat at $12 billion compared to the year-ago period.
Is Dell Stock Undervalued?
Dell Technologies stock is priced at 14.4 times forward earnings, which is quite cheap, given its adjusted earnings are forecast to expand from $7.13 per share in fiscal 2024 to $9.11 per share in fiscal 2025.
A widening earnings base should help Dell Technologies fuel its dividend growth. It currently pays shareholders an annual dividend of $1.78 per share, indicating a yield of 1.6%.
In the last 12 months, its free cash flow stood at $6.17 billion or $7.39 per share, indicating a payout ratio of less than 25%, which is sustainable across market cycles. In the last two years, Dell has raised its quarterly dividend payouts from $0.33 to $0.445 per share.
Out of the 16 analysts covering Dell, 12 recommend “strong buy,” two recommend “moderate buy,” and two recommend “hold,” for a “strong buy” consensus. The average 12-month target price for Dell is $157.20, indicating an upside potential of 41.2% from current levels.
Dell operates in the rapidly expanding AI market, but its profit margins are shrinking due to competition from peers such as Super Micro Computer (SMCI). However, its cheap valuation makes DELL a top investment choice, given markets are trading near all-time highs.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
