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Stocks that are part of the artificial intelligence (AI) race have delivered market-thumping returns to shareholders in the last 18 months. Since the start of 2023, shares of tech giants such as Dell (DELL) and Super Micro Computer (SMCI) have risen by 907% and 242%, respectively, outpacing the broader markets by a wide margin.
Shares of both companies got another shot in the arm last week, after Tesla (TSLA) CEO Elon Musk confirmed that his AI company, xAI, would use technology from Dell and Super Micro Computer. In a post on X, formerly known as Twitter, Musk stated that Dell is “assembling half of the racks that are going into the supercomputer that xAI is building,” and added that Super Micro would be the other supplier.
Let’s see if these two AI server stocks are still top investment choices after already delivering outsized gains to shareholders.
Is Dell Stock a Good Buy?
In addition to personal computers, Dell Technologies (DELL) sells IT infrastructure, such as computer servers that power AI applications.
In Q1, Dell reported revenue of $22.2 billion, up 6% year over year. Its IT infrastructure business grew 22% to $9.2 billion, and was a key driver of the company's top line. This segment now accounts for 40% of total sales, up from 36% in the year-ago period.
However, shares of the company fell following its quarterly results, as gross margins fell by 250 basis points year over year. Looking ahead, Dell expects gross margins to narrow by 150 basis points in fiscal 2025 (ending in January), due to headwinds such as inflation and rising competition.
Analysts tracking Dell Technologies expect sales to rise by 9% to $96.5 billion in fiscal 2025, while earnings are forecast to expand from $7.13 per share in 2024 to $7.73 per share in 2025, with further growth to $9.14 per share in 2026.
Priced at 15 times forward earnings, DELL stock looks quite cheap compared to its AI peers.
Out of the 16 analysts tracking DELL stock, 12 recommend “strong buy,” two recommend “moderate buy,” one recommends “hold,” and one recommends “strong sell,” for a “strong buy” consensus.
The average target price for DELL stock is $159.53, about 13.4% higher than the current price.
In addition to its share price appreciation, investors can benefit from a forward dividend yield of 1.3%. Dell recently raised its dividend payout by 20%, and aims to increase dividends by at least 10% each year through fiscal 2028.
Dell reported a free cash flow of $623 million in Q1 and paid shareholders a quarterly dividend of $336 million, indicating a sustainable payout ratio of 54%.
Is SMCI Stock Overvalued?
Valued at $46.2 billion by market cap, Super Micro Computer (SMCI) is among the hottest tech stocks in the past year. In fact, it is among the few tech stocks that have beaten even Nvidia’s (NVDA) monstrous gains since 2023.
In fiscal 2023 (ended in June), SMCI increased sales by 37%, while earnings more than doubled. According to consensus estimates, the company is on track to grow sales by 110%, while earnings growth is forecast at 102% in fiscal 2024.
Super Micro Computer’s growth story is far from over, given it accounts for 10% of the AI server market. According to Bank of America (BAC), the AI server market is expected to grow by 150% in the years ahead, while SMCI’s market share might rise to 17%.
Out of the 13 analysts tracking SMCI stock, eight recommend “strong buy,” four recommend “hold,” and one recommends “strong sell,” for a “moderate buy” consensus.
The average target price for SMCI stock is $980.73, about 16.7% higher than current levels.
Wall Street expects SMCI to end fiscal 2028 with adjusted earnings of $140 per share. If the stock is priced at 20x forward earnings, it should trade at $2,800 in May 2028, significantly above its current trading price of $827.
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.
