Dell Earnings: Raising Valuation on Strong AI, but the Stock Remains Severely Overvalued

Morningstar Key Stats for Dell

• Morningstar Rating: 1 star
• Fair Value Estimate: $65.00
• Morningstar Uncertainty Rating: High
• Economic Moat: None

We raise our fair value estimate for no-moat Dell Technologies DELL to $65 per share from $55, following positive fiscal first-quarter results.

Dell reported strong artificial intelligence server sales, which we expect to gain momentum over the next few years. Despite the strong growth, AI-server sales continue to contribute only a small percentage to the firm’s top line, and are margin-dilutive. Moreover, growth in Dell’s larger PC business remains weak, and we see this as the firm’s primary driver. We adjust our valuation to recognize rising AI-server demand and an anticipated recovery of traditional server sales. However, we remain skeptical of the market’s rosy outlook on AI server growth and view shares as overvalued. With shares down close to 20% in after-hours trading, we believe the market is reining in unrealistic expectations for Dell’s ability to benefit from AI spending.

Fiscal first-quarter sales were up 6% year over year and remained flat sequentially at $22.2 billion. Client solutions group sales—led by PCs and which continue to make up the majority of Dell’s business—were roughly flat at $12 billion. Servers and networking sales rose an impressive 43% year over year, driven by high AI-optimized server sales and modest demand for traditional servers. Dell recorded AI server shipments of about $1.7 billion, which more than doubled from the prior quarter. While we are impressed by the numbers for AI-driven sales, we continue to view them as a minority driver for the overall firm. We’ve raised our valuation on the basis of higher AI growth, but continue to see current market prices implying unattainable growth and profitability in a commodity-like server business.

Non-GAAP gross margin of 22.2% was down 230 basis points sequentially, while non-GAAP operating margin of 6.6% was down 300 basis points sequentially. We model AI server sales to continue to weigh on profitability through fiscal 2025.