Is Dell Stock a Buy?

Robert Izquierdo, The Motley Fool

Sun, Apr 21, 2024, 6:15 AM 4 min read

Dell's consistent ability to beat Wall Street expectations contributed to the dramatic upsurge of its stock, but another factor playing a big role here is artificial intelligence. According to Dell COO Jeff Clarke, "We have just started to touch the AI opportunities ahead of us, including broader adoption of AI by enterprise customers."

The company's shares dropped recently along with the broader stock market. Could this present a potential buying opportunity? To help you decide whether to purchase shares, let's take a moment to assess Dell's suitability as an investment for the long haul.

Is Dell's AI-powered rise for real?

While artificial intelligence (AI) may have fueled Dell stock's rise, does the advent of AI truly create a growth opportunity for the company? After all, many businesses these days are promoting AI capabilities.

In Dell's case, it has the numbers to justify AI's role in driving sales for the firm. In its fiscal fourth quarter, ended Feb. 2, Dell saw orders for its AI-designed servers rise almost 40% when compared to the third quarter. As a result, the company expects to achieve sales of at least $91 billion in its 2025 fiscal year. This represents an increase from fiscal 2024's $88.4 billion.

While this revenue growth is modest, it factors in the cyclical nature of the computing industry. Dell CFO Yvonne McGill explained that the current macroeconomic climate "is leading customers to be more thoughtful about their infrastructure budgets, particularly in the first half" of Dell's 2025 fiscal year.

But looking beyond the current industry softness, AI is poised to deliver multi-year revenue growth for Dell. The global AI market is forecast to hit $184 billion in 2024 and increase to $827 billion by 2030.

How Dell's products are poised for AI success

Dell's products are well-positioned to benefit from the rise of AI. For example, in January semiconductor chipmaker AMD, one of Dell's partners, rolled out the industry's first desktop computer processor with an AI engine. Customers upgrading to take advantage of such devices can give Dell's revenue a boost.

The PC category, in particular, is key for Dell since it generated $48.9 billion of the company's $88.4 billion in fiscal 2024 revenue. This segment's importance makes sense given that Dell spent decades making a name for itself as the go-to provider of PCs. Dell management believes its PC division will grow. Clarke stated, "PCs will become even more essential as most day-to-day work with AI will be done on the PC."

Dell's IT infrastructure division also benefits from the AI market's rapid expansion. Along with the company's growth in orders for its AI-based servers, Dell's data-storage products can get a boost as well. This is because AI systems require a ton of data to execute tasks, and this data must be stored for use.

Other reasons to consider Dell stock

In addition to the boon that AI brings to Dell's business, another attractive aspect of the company is its ability to generate consistent free cash flow (FCF). FCF reflects the cash that Dell has available to use toward investments in its business, repurchasing shares, paying down debt, and funding its dividend.

For fiscal 2024, Dell's adjusted FCF totaled $5.6 billion, up 266% over the prior year's $1.5 billion. This strong result prompted Dell to raise its dividend by 20% this year. In fact, Dell is so confident in its AI-fueled growth that it committed to raising its dividend annually by at least 10% through its 2028 fiscal year.

The company's position in the growing AI market, its dividend, and solid FCF are compelling reasons to invest. Adding to this, the current consensus among Wall Street analysts is an overweight rating for Dell stock with a median share price of $130.

Looking at all of these factors, Dell stock looks like a good long-term investment, especially as AI adoption ramps up over the next few years. In the meantime, investors can benefit from Dell's dividend, currently yielding a respectable 1.5%.

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Robert Izquierdo has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.

Is Dell Stock a Buy? was originally published by The Motley Fool

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