The past year has been a bit rough for Dell Technologies(NYSE: DELL) stock owners as share prices of the information technology giant have dropped 23%, underperforming the S&P 500 index by a wide margin. The company's latest quarterly report didn't do much to turn the stock's fortunes around.
Dell stock fell nearly 5% after the Feb. 27 release of its fiscal 2025 fourth-quarter results (for the three months ended Jan. 31). The company's mixed quarterly report, along with the lower-than-expected revenue growth forecast for the new fiscal year, were the main culprits.
With the bad news now priced into the stock, now may be a good time to make a sizeable investment in Dell stock. Let's look at the reasons why.
AI is turning out to be a key growth driver for Dell
Dell gets some of its revenue by selling server and storage solutions through its infrastructure solutions group (ISG) business. Its client solutions group (CSG) includes sales of desktops, notebooks, workstations, and other computer peripherals. What's worth noting is that both businesses are on track to benefit from the expanding use of artificial intelligence (AI).
The ISG business, for instance, is an early beneficiary of the growing AI adoption. Demand for servers optimized for AI workloads in the cloud is increasing at a terrific pace. Dell's ISG revenue jumped by an impressive 29% in fiscal 2025, outpacing the 8% growth in its overall revenue. Dell management said it expects ISG revenue to grow at a high-teens percentage pace in fiscal 2026, driven by an anticipated $15 billion in revenue from sales of AI servers.
There is a possibility Dell's AI server revenue could exceed its expectations and drive stronger growth in the ISG business. That's because the company saw a big jump in demand for its AI servers following the close of its latest quarter. Dell ended fiscal Q4 with an order backlog of $4.1 billion for its AI servers, and then, it struck a deal with xAI last month to supply $5 billion worth of AI servers to the Elon Musk-led start-up. That puts Dell's AI server order backlog at $9 billion at present.
Looking ahead, demand for Dell servers should remain robust, thanks to recent AI infrastructure-related announcements. For example, the $500 billion Project Stargate headed by OpenAI, SoftBank, Oracle, and Abu Dhabi-based MGX to build AI data centers in the U.S. could significantly increase the demand for Dell's servers.
Meanwhile, U.S.-based tech giants are forecast to increase their capital spending by 40% in 2025 to a whopping $320 billion to support AI infrastructure growth and build more data centers. The long-term picture also appears to be bright as capital spending on data centers could exceed $1 trillion in 2029, according to market research firm Dell'Oro. Because Dell is the leading vendor of servers across the globe, it is in a terrific position to make the most of the trillion-dollar data center capex opportunity.
More reasons to take advantage of the Dell price pullback
Dell management anticipates its CSG business will grow in the low- to mid-single digits this fiscal year as compared to the 1% decline seen in fiscal 2025. This business was hamstrung by a tepid PC market, but Dell anticipates a recovery in the second half of the year. Management is also betting the advent of AI personal computers (PCs), along with an aging installed base of PCs and the end of support for Windows 10, will provide tailwinds for the PC market.
The possibility of stronger growth in the ISG business, along with the recovery in the CSG business, could help Dell deliver better-than-expected growth this year. The company projects an 8% increase in revenue at the midpoint of its guidance range to $103 billion, while adjusted earnings are expected to grow by 14% to $9.30 per share.
Consensus analysts' estimates project double-digit growth in Dell's earnings for the next couple of years.
Dell's attractive valuation makes the stock worth buying right away
Dell stock trades at just 16 times trailing earnings and 11 times forward earnings. Those multiples represent a big discount to the S&P 500 index's earnings multiple of 24. What's more, Dell stock is attractively valued based on its five-year earnings growth projections, per Yahoo! Finance. This is evident from its price/earnings-to-growth ratio (PEG ratio) of just 0.54.
The PEG ratio is calculated by dividing a company's trailing earnings multiple by the potential earnings growth it is forecast to deliver over the next five years. A reading of less than 1 means that a stock is undervalued based on its potential growth. Not surprisingly, the stock's 12-month median price target of $145 points toward a 52% jump from current levels.
So, investors looking to buy an AI stock that can deliver impressive long-term growth and is trading at a cheap valuation can consider adding Dell to their portfolios as it has the potential to deliver healthy gains going forward.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
