Share prices of Dell Technologies (DELL -0.03%) have more than tripled over the past year. The company is a leading supplier of servers, and it's experiencing tremendous demand for servers optimized for artificial intelligence (AI).
The opportunity in AI servers is one reason to be optimistic about the stock's prospects, but other areas of Dell's business, such as PC products, are weighing on the company's performance right now.
Here are the pros and cons of buying Dell stock right now.
1 reason to buy: AI server demand is hot
Dell is known to many as a PC brand. It sells everything from high-end gaming PCs to computer peripherals, but its infrastructure solutions group generated $9.3 billion of revenue in 2023's fiscal Q4, representing almost half the business.
Dell's infrastructure revenue fell 6% year over year in the quarter, but AI demand could reverse that decline. Analysts at Morgan Stanley recently declared Dell one of their top picks based on AI server momentum. The infrastructure group saw revenue grow 10% sequentially over the previous quarter, with orders for AI servers up 40%.
To its credit, Dell has successfully adapted to the needs of the IT market. It has been the server industry leader in terms of market share over the last decade, even as enterprise customers shifted from on-premise servers to the cloud. Dell generated 43% of new revenue in the industry over the last decade. This record reflects strengths in Dell's sales force and deep customer relationships.
Spending on information technology has been trending upward for years, which bodes well for Dell's infrastructure business. The spike in AI server orders last quarter shows it is well positioned to continue gaining share of the industry as AI investment ramps up.
1 reason to sell: The stock is not cheap
The reason to avoid the stock is that a lot of the upside from AI demand seems priced into the stock at these highs. It may take a while before revenue from AI is large enough to move the needle, as its backlog of AI server orders stood at $2.9 billion in the most recent quarter, which is a small percentage of Dell's total revenue.
Meanwhile, the rest of the business is hurting from a sluggish PC market. Management expects revenue to increase approximately 5% this year. That may not be enough to push the stock meaningfully higher when it already trades at a forward price-to-earnings ratio of 19.
It's worth noting that virtually all of the stock's return last year was driven by an increase in the P/E multiple, not growth in the underlying business. Investors bid up the shares when it was trading at less than 10 times trailing earnings over a year ago, so further gains from here can only be sustained by growth in Dell's earnings per share (EPS).
The Wall Street consensus has EPS reaching $9.90 annually in the next two years. Assuming the stock is still trading at the same valuation, that would put the share price around $175 in 2026. That implies an upside of only 17%, which may not even keep up with the market indexes in the current bull market.
