On the surface, Dell Technologies (NYSE: DELL) I’ve just had a pretty gloomy quarter. With the PC and laptop market still suffering from over-inventory and the data center server market (especially for cloud computing) also seeing some weakness, Dell reported a 13% year-on-year revenue decline for the second quarter of 2024.
Nevertheless, while Dell’s financials fell, it significantly exceeded expectations thanks to strong performance in its artificial intelligence (AI) server business, especially new generative AI services powered by Nvidia graphics processing units (GPUs).
Dell indicates stronger performance is on the way. At just 26 times trailing-twelve-month earnings per share, or just under ten times trailing-twelve-month free cash flow, Dell is certainly much cheaper than Nvidia – even cheaper than its fast-growing AI server rival Super microcomputer. Are Dell shares a buy?
Data per YCharts. PE ratio = price-earnings ratio.
Dell is ready to make money with AI
So, with revenue down 13% year over year to $22.9 billion in the second quarter, what are investors excited about sleepy old tech stock Dell? Well, revenue in the quarter exceeded management’s expectations given in early June, coming in at a whopping $21.2 billion.
Shareholders can thank data center storage devices like the PowerFlex, which management said demand doubled compared to last year in the second quarter. Additionally, the PowerEdge Dell COO Jeff Clarke said generative AI represented 20% of total server revenue in the second quarter, representing approximately $860 million in AI sales (20% of Dell’s $4.3 billion from the server and networking segment) last quarter .
Due to the higher average selling prices for these servers versus older models, as well as Dell’s cost controls and stock buyback plan, second quarter earnings per share (EPS) fell only 7% year over year. On an adjusted basis, excluding non-cash depreciation and stock-based compensation expense, earnings per share actually rose 4% year over year.
A better AI stock than Nvidia and Super Micro?
Investors may be attracted to Dell’s value stock status, especially when measured by free cash flow. There’s a dividend that currently yields almost 2.2% per year at the time of writing, and the company is also supplementing that with some share buybacks ($264 million worth last quarter).
Keep in mind, however, that Dell’s resurgent growth from AI is heavily dependent on Nvidia’s technology, as well as that of Nvidia and its manufacturing partners (such as Taiwanese semiconductor manufacturing) possibilities to provide him with chips. Moreover, Dell’s PC and laptop segment comprises more than half of its revenue. PCs and laptops are no longer a major growth market and will go up and down from year to year based on consumer and business demand.
By comparison, Super Micro only builds servers, with a main focus on AI. As CEO Charles Liang said on the latest quarterly conference call, he is a “good friend” of Nvidia CEO Jensen Huang. For investors looking for more targeted AI server growth, Super Micro is probably the better choice right now.
However, that doesn’t mean one of these server shares will automatically be purchased. For Dell and Super Micro, building servers is also a cyclical business, and big ramp-ups for expansion can be followed by serious downturns – and with those downturns the company can fall into unprofitable territory.
Data per YCharts. TTM = after 12 months.
Keep this in mind before chasing Dell stock, or even the faster-growing Super Micro.
Overall, weakness in Dell’s non-AI business this year will likely remain a headwind that keeps revenue declining year-over-year. I don’t buy. But it’s worth keeping an eye on as competition for the AI server space – provided by Nvidia chips and technology – increases between Dell and competitors like Super Micro.
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Nicholas Rossolillo holds positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.