When it comes to artificial intelligence (AI), the mega-cap tech companies collectively referred to as the “Magnificent Seven” get the most attention.
In my opinion, the Magnificent Seven represents big ideas with AI. Members like for example Nvidia, TeslaAnd Microsoft can help investors assess how AI is being deployed in data centers, autonomous driving and cloud computing.
Smart investors understand that there are other opportunities besides big tech. And it’s these behind-the-scenes players who act as individual threads that help stitch the bigger ideas together.
An opportunity that wouldn’t make me lose sleep Dell Technologies (NYSE: DELL). Although the stock is up 76% so far in 2024, the stock is down 20% since the company reported earnings on May 30.
Let’s look at how Dell fits into the broader AI equation and explore why this is now an attractive opportunity to buy the dip.
Why is Dell important for AI?
Dell divides its financial results into two categories: Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG).
CSG is primarily a hardware company and represents sales of the company’s computers, workstations and support services. When it comes to AI, investors should keep an eye on Dell’s ISG performance.
It is this segment that reflects the company’s presence in storage solutions, data center services and network infrastructure.
How is Dell’s business performing?
This slide is from Dell’s earnings presentation for the first quarter of fiscal 2025 (ending May 3).
During the quarter, Dell’s ISG business generated revenue of $9.2 billion, up 22% year over year. Server and networking revenue rose 42% year over year to $5.5 billion, while storage solutions revenue was flat year over year and fell 16% quarter over quarter.
The decline in storage revenues impacted ISG’s operating margin, which actually fell 1% year-over-year to $736 million. However, management tempered expectations by explaining that “Q1 is our lowest profitability quarter seasonally in ISG given storage seasonality, and we expect ISG’s operating margin to improve as the year progresses.”
According to data from IDC, Dell has a larger market share in storage systems than its second, third and fourth largest competitors combined. Additionally, management within the server and networking group touted the company’s PowerEdge XE9680 server as the fastest growing solution in Dell’s history.
I think these data points undermine Dell’s strong position in AI. However, investors should exercise some patience as the long-term tailwinds fueling demand trends continue to take hold.
Dell’s compelling valuation
The chart illustrates Dell’s price-to-earnings (P/E) ratio, compared to a number of comparable companies. The striking deviations in the graph are Super microcomputer And Arista Networkswith price-earnings ratios of more than 40.
A sensible strategy is to use dollar-cost averaging when building a position in stocks. While Dell stock has seen some momentum, the difference between the valuation multiples depicted here is hard to gloss over.
While Dell’s price-to-earnings ratio of 27 isn’t dirt cheap, I think the stock looks like a bargain compared to some of its peers. Furthermore, when it comes to the intersection of IT infrastructure and AI solutions, I think Supermicro in particular has already priced in a lot of advantages. For this reason, I see Dell more as an under-the-radar opportunity.
Now seems like an interesting time to pick up stock in Dell as the stock is experiencing a sell-off. I don’t see any reason why the company’s ISG business should come to an abrupt halt or experience any unwanted turbulence due to competition. Rather, I think Dell is quietly building a respectable position in the AI landscape and see the company as an emerging leader in the making.
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Adam Spatacco has positions at Microsoft, Nvidia and Tesla. The Motley Fool holds positions in and recommends Arista Networks, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
1 Beaten Artificial Intelligence (AI) Stock to Buy Right Now was originally published by The Motley Fool
