Dell Technologies (DELL 0.12%) stock is red hot -- not because PC demand is growing, but because investors have decided that Dell is now an artificial intelligence (AI) stock, a realization that tripled the share price of the computer company over the last 52 weeks.
Last quarter, Dell shipped $800 million worth of AI-optimized servers, as Bank of America analyst Wamsi Mohan points out in a report covered by StreetInsider, and Dell's backlog of AI server orders nearly doubled in comparison to fiscal Q3 2024. Anticipating that this momentum will continue, Mohan raised his price target on Dell stock Wednesday, to $130 a share -- implying an 18% upside.
Is Dell stock a buy?
Dell is riding a tailwind from the AI revolution, and this is why Mohan believes the stock will continue to outperform the market. But could it be that $130 is too much to pay for a share of Dell stock over the next year?
I think it might be.
Consider that while Dell enjoyed strong profit growth last quarter, with EPS up nearly 90% year over year, consensus forecasts for the company's long-term prospects don't anticipate anything like that level of growth remaining sustainable. Over the next five years, for example, S&P Global Market Intelligence forecasts Dell's per-share earnings might rise as high as $7.33 -- which would be only a 68% total increase, and closer to 11% per year, compounded.
Ordinarily, for a stock growing at 11%, you'd want to pay no more than 11 times trailing earnings. But Dell stock trades at more than twice that -- 24x earnings.
What's holding Dell back? You won't be surprised to learn that Nvidia (NVDA 6.18%) could be the culprit. As Mohan observed, Dell has plenty of demand for its products, but its supply of Nvidia GPUs is limited. Simply put, Nvidia, which produces the H100 and H200 AI chips that Dell needs for its servers, has a chokehold on this market. This limits both how quickly Dell can grow server production to meet demand -- and lets Nvidia keep most of the profit for itself.
