Shares of Dell Technologies (DELL 1.34%) jumped 20.5% in March, according to data provided by S&P Global Market Intelligence. The entirety of this big gain happened on the first day of the month, right after the company released financial results for its fiscal fourth quarter of 2024.
To be clear, it's not as if Dell's financial results were necessarily impressive in isolation. The company's net revenue was down 14% year over year in its fiscal 2024 and down 11% in Q4. A weak PC market isn't helping its numbers. And the drop in revenue led to a 10% drop in full-year operating income.
Dell stock nevertheless surged to an all-time high in March because investors are looking past the trailing numbers and toward the company's potential with artificial intelligence (AI).
Indeed, Dell suddenly has a skyrocketing backlog of orders for its AI-optimized servers, which has investors excited.
A bright spot in a slow year
On March 25, Dell filed its annual report with the Securities and Exchange Commission (SEC). One of the things that made headlines was the company's workforce. The filing showed that it had reduced its workforce by about 6,000 people during fiscal 2024, a reminder that business isn't exactly booming overall.
But business for AI-optimized servers is booming. Dell's management said that it had $800 million in shipments for AI-optimized servers in Q4 alone. For perspective, it only had $500 million in shipments in the fiscal third quarter. Moreover, its backlog for these servers hit $2.9 billion in Q4, up from a $1.6 billion backlog in Q3.
Investors are looking at this rapidly increasing demand and projecting good things for Dell.
What investors need to know
Most investors and analysts believe that AI is a substantial long-term trend and not a fly-by-night gimmick. But there is a question as to how it will be deployed and what its final form will be. Many companies are counting on cloud computing platforms to provide the AI expertise and power. But Dell's business is betting on a different angle -- AI-equipped on-premise servers.
I believe the valuation for Dell stock is high right now based on historical norms. Its current valuation of 30 times earnings is steeper than where it's traded in the past.
DELL PE Ratio data by YCharts
Moreover, Dell's $2.9 billion backlog for AI-optimized servers is really small in comparison to its $88 billion in full-year revenue.
That said, if the AI trend continues picking up speed and if management is correct that AI will increasingly be powered by on-premise servers, Dell could be in an optimal position to profit over the long term. Additionally, its current results are muted by the normal cyclicality of its PC business, but eventually this could pick back up and provide an additional boost.
Therefore, Dell stock could have more long-term upside. Investors just need to be aware that its current valuation is high if things don't play out as expected.
