Dell Technologies (DELL +1.60%), one of the world's largest producers of PCs and servers, went public in 1988. Its business initially flourished as the desktop and laptop markets grew, but it ran out of steam after the dot-com crash.
From 2000 to 2013, Dell's PC sales slowed, it "di-worsified" its business with expensive acquisitions, and missed the shift toward mobile devices. In late 2013, Michael Dell and Silver Lake Partners took the company private for $25 billion.
Image source: Getty Images.
That seemed to mark the end of Dell as a public company. However, as a private company, it divested its weaker businesses and streamlined its core PC, server, and data-storage businesses. In December 2018, it went public again in a complex deal requiring it to buy back some of its tracking shares in VMware to skip the typical initial public offering process.
Dell then spun off its stake in VMware, which was acquired by Broadcom last year, and the rest of the company is now worth about $82.5 billion. Could it keep growing and become a trillion-dollar stock by 2040?
NYSE: DELL
Key Data Points
Dell is still a slow-growth company
Dell operates two main businesses. In fiscal 2024 (which ended in February), it generated 55% of its revenue from its client solutions group, which sells its PCs and PC peripherals. Another 38% came from its infrastructure solutions group, which sells its servers and data storage products.
Dell is the world's third-largest producer of PCs and the top maker of servers. It trails behind Lenovo and HP in the PC market, but it's comfortably ahead of its closest competitors in the server market: Hewlett Packard Enterprise, Lenovo, and Super Micro Computer.
But the PC and server markets are heavily commoditized, highly cyclical, and vulnerable to macroeconomic headwinds. That's why Dell's revenue growth decelerated significantly over the past two fiscal years.
|
Segment |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|
|
Client solutions revenue growth |
27% |
(5%) |
(16%) |
|
Infrastructure solutions revenue growth |
4% |
12% |
(12%) |
|
Total revenue growth |
17% |
1% |
(14%) |
Data source: Dell Technologies.
Dell's client solutions revenue soared in fiscal 2022 as the pandemic drove more people to upgrade their PCs. But that market cooled after that growth spurt, and inflationary headwinds for consumer spending exacerbated its slowdown.
Its infrastructure solutions business benefited from the data center market's growing demand for new AI-optimized servers, but that gain was offset by sluggish sales of data storage hardware. That's why Dell's growth stalled out in fiscal 2024.
But its growth should stabilize over the next few years
Dell expects both its client and infrastructure businesses to return to growth in fiscal 2025 as the PC market stabilizes, it sells more dedicated AI servers, and the market's demand for new data storage hardware warms up again. In other words, the company likely passed its cyclical trough in fiscal 2024.
Over the long term, management expects to grow its annual revenue at an average rate of 3% to 4%, its adjusted earnings per share (EPS) at more than 8%, and to consistently allocate at least 80% of its adjusted free cash flow (FCF) to buybacks and dividends.
Could Dell become a trillion-dollar tech stock?
That's a stable outlook, but it probably won't turn Dell into a trillion-dollar stock. Let's assume that from fiscal 2024 to fiscal 2040, revenue has a compound annual growth rate (CAGR) of 4% and adjusted EPS has a CAGR of 8%.
That trajectory would nearly double Dell's annual revenue from $88.4 billion to $165.8 billion and boost its adjusted earnings from $7.13 to about $25 per share. If it still trades at 15 times forward earnings by then, its share price would be $375. That would represent a gain of nearly 220% from its current price and boost its market cap to around $264 billion.
Even with a more generous forward price-to-earnings ratio of 20, Dell's stock would only rise roughly 320% to $500 and lift its market cap to about $370 billion. So unless its growth unexpectedly accelerates or it acquires some other much faster-growing businesses, it probably won't come anywhere close to joining the four-comma club by 2040.
That said, Dell could still be a solid long-term investment. Its stock is cheap relative to its peers, it pays a decent forward yield of 1.5%, and it plans to return most of its cash to its investors. Its rising sales of dedicated AI servers should also offset the slower growth of its legacy PC, data storage, and non-AI server businesses for the foreseeable future.
