With a valuation more than 6 times sales, Tesla (TSLA -0.40%) costs significantly more than rival automotive stocks like Ford and General Motors, both of which sell for mere fractions of 1 times sales. Tesla fans defend Tesla's high valuation, arguing Tesla is more than just a car company -- that its investments in artificial intelligence to power its self-driving car technology mean Tesla is really an AI company.
And investors in Dell Technologies (DELL -17.87%) had better hope they're right.
On Thursday, Dell won a big upgrade when investment bank Evercore ISI raised its price target on the stock from $140 to $165. As Evercore explained, its reason for upgrading Dell is because Tesla is buying much of its AI server capacity from Dell Technologies.
Is Dell stock a buy?
Assume Evercore is right about that. Would it mean that Dell stock is a buy at its current share price of $146? Would it mean the stock is actually worth as much as $165?
In Thursday's note on StreetInsider.com, Evercore argues that Dell is winning "a large proportion" of Tesla contracts to supply it with servers equipped with Nvidia H100 AI computer chips. The analyst hypothesizes that server demand could add as much as $3 billion to Dell's revenue in 2024. Additionally, Evercore argues that Dell is winning orders for storage computing to support all the AI capacity it is selling, adding even more revenue growth.
According to the analyst, all this computing demand from Tesla could add three or even four percentage points to Dell's five-year projected growth rate (currently just under 12%).
But here's the thing: Even if Evercore is right, and Dell ends up growing, say, 16% in 2024, that still isn't fast enough growth to justify Dell's current 32.6 times trailing earnings valuation. To justify today's price (let alone Evercore's $165 target price), you'd want to see Dell growing somewhere closer to 30%. 16% growth simply isn't fast enough.
Long story short, even with Tesla as a customer, Dell's growth is too slow, and its stock price is too high.
