On the surface, Dell Technologies (DELL 0.12%) just had a pretty dismal quarter. With the PC and laptop market still working through too much inventory and the data center server market (especially for cloud computing) also suffering some weakness, Dell reported a second-quarter, fiscal 2024 revenue decline of 13% compared to last year.
Nevertheless, though financials were down, Dell significantly beat 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 is signaling that more strong performance is coming. At just 26 times trailing-12-month earnings per share, or just under 10 times trailing-12-month free cash flow, Dell is certainly far cheaper than Nvidia -- even cheaper than fast-growing AI server competitor Super Micro Computer. Is Dell stock a buy?
Data by YCharts. PE Ratio = price-to-earnings ratio.
Dell is ready to cash in on AI
So, with revenue down 13% year over year to $22.9 billion in Q2, what has investors excited about sleepy old tech stock Dell? Well, revenue in the quarter sailed past management's guidance provided in early June for as much as $21.2 billion.
Shareholders can thank data center storage devices like the PowerFlex, which management said doubled in demand compared to last year in Q2. Also, the PowerEdge XE9680 server powered by Nvidia's high-end GPUs for generative AI -- which just started shipping at the end of March -- now has a more than $2 billion backlog of customer orders. Dell COO Jeff Clarke said generative AI represented 20% of total server revenue in Q2, implying about $860 million in AI sales (20% of Dell's $4.3 billion from server and networking segment) last quarter.
Because of higher average selling prices for these servers versus older models, as well as Dell's cost controls and share repurchase plan, earnings per share (EPS) only fell 7% year over year in Q2. On an adjusted basis, excluding non-cash amortization and employee stock-based compensation expenses, EPS actually increased 4% year over year.
A better AI stock than Nvidia and Super Micro?
Investors may be drawn in by Dell's value stock status, especially when measuring it by free cash flow. There's a dividend currently yielding nearly 2.2% a year as of this writing, and the company also supplements that with some stock buybacks ($264 million worth last quarter).
Bear in mind, though, that Dell's resurgent growth from AI is highly reliant on Nvidia's technology, as well as on Nvidia's and its manufacturing partners' (like Taiwan Semiconductor Manufacturing) abilities to supply it with chips. Additionally, Dell's PC and laptop segment comprises more than half its revenue. PCs and laptops are no longer a major growth market and will ebb and flow from one year to the next based on consumer and business demand.
By comparison, Super Micro only builds servers, focusing particularly on AI. As its CEO Charles Liang said on the last quarterly conference call, he is a "close friend" of Nvidia CEO Jensen Huang. For investors looking for more focused AI server growth, Super Micro is probably the better bet right now.
That doesn't mean either of these server stocks is an automatic buy, though. For Dell and Super Micro, server building is also a cyclical business, and big run-ups in expansion can be followed by severe downturns -- and with those downturns, swings into unprofitable territory.
Data by YCharts. TTM = trailing 12 months.
Bear this in mind before chasing Dell stock -- or even faster-growing Super Micro, for that matter.
Overall, for the duration of this year, weakness in Dell's business outside of AI is likely to remain a headwind that keeps revenue in a year-over-year decline. I'm not buying. But it's worth keeping tabs on as competition for the AI server space -- supplied by Nvidia chips and tech -- heats up between Dell and peers like Super Micro.
