Due to the widespread use of artificial intelligence (AI), the stock prices of many companies have risen significantly over the past year or so. Dell Technologies (NYSE: DELL) Dell shares have more than tripled in the past year as investors bought large amounts of the company's stock, betting it stands to gain big from the growing adoption of AI.
This isn't surprising, as Dell is well positioned to capitalize on two lucrative AI-related growth opportunities: servers and personal computers (PCs). And recent developments suggest the company is taking steps to capitalize on these two markets. Let's take a closer look at why Dell's stock price surge could continue thanks to AI.
Surging demand for AI servers gives Dell Technologies a big boost
When Dell reported its fourth-quarter fiscal 2024 results (the three months ending Feb. 2), management noted strong demand for AI-optimized servers. Specifically, Dell's orders for AI-focused servers increased 40% quarter-over-quarter. As a result, Dell's AI server backlog nearly doubled from the previous quarter to $2.9 billion.
The company shipped $800 million worth of AI servers in the fourth quarter, and its strong order backlog indicates that number is likely to continue to climb in future quarters. More importantly, Dell is just scratching the surface of a huge growth opportunity for AI servers, with the market expected to generate $33 billion in revenue in 2024, according to market research firm IDC.
Another estimate from electronics contract manufacturer Foxconn puts the AI server market at $150 billion by 2027, so it wouldn't be surprising if demand for Dell's AI servers surged in the long term, especially given the company's optimization of its AI servers. NVIDIA.
Dell recently announced an expanded partnership with AI chip leader Nvidia to offer server solutions optimized for the company's next-generation Blackwell AI graphics processing units (GPUs). It's worth noting that Dell is offering liquid-cooled servers powered by Nvidia's Blackwell processors, which is a smart move considering the market for liquid-cooled data centers is expected to grow at about 25% annually over the next decade.
Notably, demand for Nvidia's upcoming Blackwell AI chips is expected to remain very strong in 2025. KeyBanc's John Vinh estimates that Blackwell processors could help Nvidia's data center revenues soar to $200 billion in 2025, up from $47.5 billion last year.
So Dell is right to bring its Blackwell-focused AI server solutions to market, and should be able to take advantage of the massive demand for Nvidia's chips. More importantly, the long-term opportunity in the AI server market bodes well for Dell, one of the major players in the space.
The PC business is likely to improve
Weak PC demand over the past few years has weighed on Dell's performance. Last fiscal year, the company's revenue fell 14% year over year to $88.4 billion. Revenue from the company's Client Solutions Group (CSG), which includes sales of commercial and consumer PCs, is expected to fall 16% year over year to $48.9 billion in fiscal 2024.
This isn't surprising, since PC shipments are expected to decline 14% in 2023, according to IDC. But the arrival of AI-enabled PCs could be the catalyst for turning this market around for Dell, the third-largest PC seller with just over 15% market share. According to market research firm Canalys, AI PC shipments are expected to grow at a staggering 44% annual growth rate through 2028.
Dell is targeting this market, and recently announced a new PC portfolio with on-device AI capabilities that allow users to generate images locally using text input, translate “any live or recorded audio in 44 languages into English,” and use AI to increase the resolution of games and videos in real time for a more immersive experience.
Dell remains “bullish about the upcoming PC refresh cycle and the long-term impact of AI on the PC market,” and its product development efforts should enable it to seize the opportunity and pull its CSG business out of its slump.
It makes sense to buy this stock at this point.
Dell's earnings for fiscal 2024 fell 6% to $7.13 per share, but analysts expect the company's profits to turn to growth this fiscal year and then post healthier growth in the years to come.
And as the chart above shows, analysts are raising their earnings growth estimates for Dell. The stock currently trades at 20 times forward earnings, a discount to the Nasdaq-100's 27 times forward earnings (which we use as a proxy for tech stocks), making investors buying this AI stock at a bargain price right now, despite the impressive gains it's generated over the past year.
Considering the growth potential that AI could bring to the company, buying Dell at this valuation seems like a smart choice, as the market could continue to give the stock further gains given the accelerating revenue growth that the company is expected to deliver.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool invests in and recommends Nvidia. The Motley Fool has a disclosure policy.
This artificial intelligence (AI) stock has tripled in a year, and you might regret not buying it before it soared even higher. This was originally published by The Motley Fool.
