Is Dell Technologies Stock a Buy Now?

Dell Technologies (NYSE: DELL) stock has returned a spectacular 81% thus far in 2024. The computing hardware giant is benefiting from a wave of demand for artificial intelligence (AI) infrastructure solutions driving strong growth and an accelerating earnings outlook.

The results have earned Dell an inclusion in the S&P 500 index, highlighting the company's industry leadership and blue chip status. On the other hand, the stock hasn't been immune to volatility. It's currently down 25% from a record high of $179.70 on May 29.

Let's discuss whether now is a good time to add Dell Technologies stock to your portfolio.

AI-powered growth

Artificial intelligence has quickly emerged in the last few years as one of the most important themes in technology. Advancements in machine learning and generative AI are already delivering transformative productivity and efficiency gains in various industries. There is a sense that innovation in AI applications is just getting started.

While the specialized AI chips from companies like Nvidia or Advanced Micro Devices make the proverbial magic happen, an ecosystem of hardware is equally critical. In this case, Dell servers that house AI chips alongside data center networking equipment are at ground zero to capture the same secular growth tailwinds.

The results have been impressive. In the second quarter (for the period ended Aug. 2), Dell management noted that its AI momentum accelerated, reflected in a 38% increase in revenue for the infrastructure solutions group compared to the prior-year quarter. This strength more than balanced the weaker consumer side of the business covering personal computers (PCs) and accessories.

The ongoing shift toward high-value AI products has driven a ramp-up in profitability, despite ongoing cost pressures and intensive investment spending.

For the full year, Dell forecasts annual revenue growth of around 10% and an adjusted earnings per share (EPS) midpoint estimate of $7.80, representing a 9% increase from last year. The company is also forecasting 3% to 4% annual revenue growth and an annual EPS increase above 8% in the long term.

Strong cash flows have supported ongoing share repurchases and debt repayment as evidence of overall solid fundamentals, with an expectation for the trends to continue.

Image source: Getty Images.

AI hardware leadership

The attraction of Dell Technologies stock as an investment is the company's diverse group of products and leading market share position across key server, PC, and storage categories. Even as certain segments have faced intense competition and soft growth, there is a lot of optimism about the new opportunities with AI.

Dell estimates that it operates in a $121 billion addressable market for hardware and services, expected to expand by 44% to $174 billion by 2027. The ability to consolidate its leadership position should translate directly into profitable growth.

Into 2025, Dell is also well-positioned to capture a possible rebound in the consumer PC market. A backdrop of resilient macroeconomic conditions into 2025 with an expectation for the Federal Reserve to further cut interest rates could jump-start a PC refresh cycle facilitated by improving consumer credit conditions. The bullish case for the stock is that Dell can ultimately outperform expectations.

Maybe the biggest industry development has been the turmoil at competitor Super Micro Computer, which competes with Dell in the AI-optimized high-performance computing server segment. In this case, Super Micro has been rocked by an accounting scandal as its auditor resigned in October, creating significant uncertainties regarding the company's outlook. Dell stands to benefit if it can use this situation to generate business from customers seeking a new supplier.

If there is some room for caution, shares of Dell are trading at 18 times its full-year EPS estimate as a forward price-to-earnings (P/E) ratio. This level represents a premium compared to the multiple's five-year average of closer to 11. Dell's exposure to the high-growth AI server business can justify that wider spread, but it also adds to risks in a scenario where results disappoint.

DELL PE Ratio (Forward) data by YCharts.

Is Dell a buy?

I believe shares of Dell deserve a buy rating and are a great option for investors within a diversified portfolio following the sell-off from its peak level earlier this year. A solid update when the company reports its third-quarter earnings on Nov. 26 could be a catalyst for the stock to rally higher.

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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.