Dell stock shot up 31% following its fiscal Q4 results. The market was excited to see orders for AI-optimized surge 40% QoQ despite only contributing 5% of overall revenue. There is certainly room in Dell’s valuation when management convinces the market it’s a serious AI player with each subsequent earnings report. Compared to other AI stocks, Dell is a slow-growth company, per analyst estimates. As a percentage of revenue, SMCI has 50% AI revenue versus Dell’s 5% AI revenue.
There is also a concern among analysts due to dilutive margins from the company’s AI server portfolio, mixed with additional pricing pressures on traditional servers due to inflationary pressures and an intensely competitive market.
Ultimately, there are a few key things we’d like to see from Dell as we consider a position. We detail this and more below.
Revenue and Earnings:
Dell reported fiscal Q4 revenue of $22.3 billion for revenue decline of (-10.9%). This was flat QoQ but an improvement from the April quarter at (-19.9%). Dell is expected to return to positive growth next quarter at 3.3% for revenue of $21.6 billion.
For the full year, analysts are expecting growth of 5.8% for revenue of $93.5 billion.
Revenue Segments:
The lower total revenue was driven by a (-6%) decrease in Infrastructure Solutions Group (ISG) and a (-12%) decrease in the Client Solutions Group (CSG) YoY.
Client Solutions Group (CSG) delivered fourth quarter revenue of $11.7 billion, down (-5%) sequentially and (-12%) year over year. Commercial client revenue was $9.6 billion, and Consumer revenue was $2.2 billion. Operating income from the segment was $726 million. Full-year CSG revenue was $48.9 billion, down (-16%) year over year, and full-year operating income was $3.5 billion, down (-8%) year over year.
Moving forward, CSG is expected “to be down in the low single digits, so minus three about year-over-year.” Management has indicated a recovery in PCs is likely in the second half of the year.
Infrastructure Solutions Group (ISG) incl AI revenue:
ISG revenue was $9.3 billion, down (-6%) and up 10% sequentially. Servers and networking revenue was $4.9 billion, down (-2%) year-over-year and up 4% sequentially. ISG operating income was 15.3% of revenue and $1.4 billion was down (-7%), driven by a decline in revenue and a lower gross margin rate given the higher AI-optimized server mix, partially offset by lower operating expense.
Moving forward, ISG is expected “to grow in the teens driven by traditional and AI services.” Per the CFO: “[…] from a traditional server standpoint, we're expecting modest growth, so growth in the upcoming year. AI servers, certainly a very strong growth, especially from a year-over-year standpoint. And then storage, will lag a bit, but we expect tailwinds as the year progresses in the storage portfolio.”
Per management: “Our AI mix of server demand increased again sequentially given strong customer interest in GenAI.” The company shipped $800 million of AI-optimized servers with a backlog that “nearly doubled sequentially, exiting the fiscal year at $2.9 billion.” The press release stated orders increased nearly 40% sequentially and backlog nearly doubled to reach the $2.9 billion. Regarding how the backlog digests, it was later stated: “We believe we will ship more in Q1 than we shipped in Q4. As we look forward in our annual guidance, Yvonne has our best estimate of our demand and fulfillment of that demand that we've put into the annual guidance.”
Additional commentary was offered on the earnings call: “Demand continues to outpace GPU supply, though we are seeing H100 lead times improving. We are also seeing strong interest in orders for AI-optimized servers equipped with the next generation of AI GPUs, including the H200 and the MI300X. Most customers are still in the early stages of their AI journey, and they are very interested in what we are doing at Dell.”
Storage revenue of $4.5 billion was down (-10%) year-over-year and up 16% sequentially. Per management: “demand improved sequentially across the storage portfolio, above our normal seasonality.” Storage reported improved profitability due to a mix of proprietary storage software.
Margins:
Margins have improved YoY as the company juggles margin contraction and margin expansion in varied segments. The company is not expected to continue this trend of improving profit margins for a few reasons. First, the high-growth AI market is generating lower margins than the company’s other leading products. In addition, the company expects input costs to increase further in FY25, driven by anticipated inflation for component costs as the year progresses. Management also anticipates the pricing environment to be more competitive in FY25.
Gross margin has been steady at 23% to 24% although this may change with higher AI product mix and also inflationary input costs. Gross profits were $5.32 billion last quarter. The CFO guided a 100-basis points moderation in the adjusted gross margin for FY2025 and to be 200 bps lower next quarter. For reference, FY2024 adjusted GM was 24.3%.
Operating margin of 6.7% is up 190 bps from the year ago quarter as operating expenses as a percentage of revenue was reduced to 17.1% compared to 18.3% in the same quarter last year. This is also higher than FY2024 at 5.9% operating margin. Adjusted operating margin was 9.6%.
Net margin of 5.2% was up 270 bps from the year ago quarter. This is higher than FY2024 net margin of 3.6%. The adjusted net margin was 7.2%.
Margins were a focus in the Q&A with the CFO expanding on what will drive lower margins next quarter:
“And then we get to gross margin rate, which I think is the key to your question. So we expect that to be down quarter-on-quarter, about 200 basis points. Now, what is supporting that expectation? We are seasonally lower in storage mix. We see that every Q4 to Q1, so that's one of the drivers. We will have higher AI optimized server mix in Q1. Jeff already talked about that in question.
And then holistically, we have another few influences on the margin. We've got an inflationary component cost environment. We're moving from deflationary last year to inflationary in the year that we are in right now. And then I'd say there's more competitive pressure. We're seeing more and more of that. And so that's what we expect to be impacting the gross margin. And I'd say operating margin rates will be down quarter-over-quarter due to all the items I just mentioned. But for the year, we're expecting improved performance as the quarters progress.”
Regarding competitive pressure, this is coming from traditional servers. Per the CEO: “we did see in traditional servers that in large bids, the competitiveness did increase quarter-over-quarter in Q4. We expect that to continue.”
Dell had a large beat on adjusted EPS reporting $2.20 compared to $1.72 expected for a beat of 27.9%. Next quarter, the company is expected to report $1.22 for a decline of (-7.1%). We discussed above some of the factors like inflationary cost pressure, seasonality lower storage revenue mix, and higher proportion of AI product mix for lower margins in the next quarter.
Cash Flow:
Operating cash flow of $1.53 billion in fiscal Q4 represented a margin of 6.9%. Free cash flow of $806 million represented a FCF margin of 3.6%.
There is $8.7 billion in cash and investments on the balance sheet and $26 billion in debt. Debt has decreased since Q4 2023 from $29.59B to $25.99B for Q4 2024 as the company focused on deleveraging.
Dell announced a 20% hike in the annual dividend to $1.78 per share and substantial share buyback program reflects Dell's confidence in sustained cash flow generation and long-term value creation. Per the earnings call: “we repurchased 11.2 million shares of stock at an average price of $74.67 and paid a $0.37 per share quarterly dividend. And earlier today, we announced a 20% increase in our annual dividend to $1.78 per share, well above our long-term financial framework and a testament to our confidence in the business and our ability to generate strong cash flow.”
Earnings Call:
Dell’s management team is expecting a return to growth with a focus on AI and a bullish view on the PC refresh cycle by the exit of FY2025.
AI-Related Revenue
The 40% QoQ growth in AI servers is clearly the driver for the 30%+ after hours pop the day the company reported. Here are some of the more pertinent points discussed on the call regarding AI revenue:
From the CEO, regarding where the demand is coming from – notably, Dell’s management was quite clear their AI opportunity is more with enterprises and on-premise servers as opposed to purely hyperscalers. This helps explain why Dell’s AI revenue is ramping more slowly as it’s more of a phase two server company (phase 2 being enterprise-driven, client-driven, and especially characterized by edge AI).
“Let me start with maybe the demand. And you heard us talk about the demand up sequentially 40%. And that demand was across a rich customer set. The number of CSPs grew, the number of enterprise buyers grew. So for us, two important indicators is less concentrated this quarter than the previous quarter with more customers in both the CSP category and the enterprise category buying from us.And you heard us talk about the demand up sequentially 40%. And that demand was across a rich customer set. The number of CSPs grew, the number of enterprise buyers grew. So for us, two important indicators is less concentrated this quarter than the previous quarter with more customers in both the CSP category and the enterprise category buying from us.
That demand was spread across the H100, H800, the H200 and the MI300X. So we sold a broad portfolio or a broad portfolio of silicon diversity into the marketplace for our customers […] Probably another important characterization about the demand and how the backlog looks is the pipeline grew. We talked about our five-quarter pipeline at the last call. The five-quarter pipeline grew this quarter as well. So who we sold to grew. The potential of who we're going to sell to grew. The number of shipments that we had during the quarter grew and the backlog grew. And we expect to ship more in Q1 than we shipped in Q4. I hope that was the color that you're looking forbably another important characterization about the demand and how the backlog looks is the pipeline grew. We talked about our five-quarter pipeline at the last call. The five-quarter pipeline grew this quarter as well. So who we sold to grew. The potential of who we're going to sell to grew. The number of shipments that we had during the quarter grew and the backlog grew. And we expect to ship more in Q1 than we shipped in Q4. I hope that was the color that you're looking for.”
In Jeff Clark’s, CEO, opening remarks, “We saw strong demand continue for our AI-optimized server portfolio, including our flagship PowerEdge XE9680, which remains the fastest-ramping solution in company history. We have just started to touch the AI opportunities ahead of us, including broader adoption of AI by enterprise customers and the projected growth in unstructured data where we are well-positioned with industry-leading storage solutions.”
Margins, and the fact Dell’s AI servers have dilutive margins, was a common focus for analysts on the call. AI server sales were less than 5% of overall revenues, however it’s expected AI will have a negative impact on profit margins for the company as it grows. As of now, margins have expanded YoY and QoQ.
Enterprise is an AI Opportunity for Dell:
I want to drill down on the comment I made above that enterprise is where Dell anticipates they will see a larger AI product mix as they will then be able to cross-sell. On the call, Dell’s CFO pointed toward enterprise being a larger opportunity than hyperscalers for their servers. The CFO stated: “What I'm really excited about is the other thing that Jeff talked about on really getting more and more value out of our GPU servers, really with, as we move more and more into the enterprise and get more richly configured, more services, etcetera, attached to that.”really getting more and more value out of our GPU servers, really with, as we move more and more into the enterprise and get more richly configured, more services, etcetera, attached to that.”
The CEO backed this up by saying: “That's the path. There's storage, deployment services, pro support, our consulting services, networking, so in the entire basket of the solution.”
Later, the CEO stated again: “I need to mention we got a storage opportunity in there, that we have a networking opportunity in there, and we have a services opportunity in there and to go for the last of the bunch of financing opportunities. So those — how could you not be excited about that given the demand environment?”
Sizing the AI-Related Opportunity
There were also questions about how big the opportunity is and how Dell will participate as TAM rapidly grows at 20% CAGR over the next few years. The CEO answered with the following:
“The first thing you probably noticed in our web deck is we increased our view of the opportunity in the marketplace to $152 billion, 20% CAGR going forward to 2027. And quite frankly, that's probably a lagging indicator. It's still catching up. We think demand continues to be ahead of that. Primarily driven is the overall desire, demand for the computational components to do AI exceeds the supply picture. And quite frankly, it's refreshing to see. We have a high growth category here.”
This was one of the more important comments on the call:
“And then if I think long-term going forward, as we look at the opportunity, and again, we referenced the $152 billion in our web deck, but we've done some analysis that's available out in the public domain, but we're looking at an opportunity where every dollar that is for a AI server, GPU server, there's $2 to a growing $3 of professional services around that, networking around that, storage around that.”but we've done some analysis that's available out in the public domain, but we're looking at an opportunity where every dollar that is for a AI server, GPU server, there's $2 to a growing $3 of professional services around that, networking around that, storage around that.”
In October, Dell published an Investor’s Presentation that showed the AI hardware and services opportunity (ISG segment) growing at 18% CAGR for $124 billion by 2027. In the quarterly presentation, the company updated this to a 20% CAGR reaching $152 billion by 2027.
An analyst from Citi asked about the change in total addressable market (TAM) on the call:
Asiya Merchant
Hey, thank you for very much for taking my question. Great results by the way. Just a quick question. I know you guys refreshed sort of your AI TAM as part of this presentation. Just the questions that I get from investors, as you think about the 150 billion TAM that you guys are highlighting now in 27, given Dell's share in storage, obviously your server, mainstream server share and overall share tam in servers. How do you guys think about your share in this 152 billion market by 27? Should we assume the share that you guys have now for servers and storage translates itself into the 150 billion share TAM equivalent? Thank you.
Jeff Clarke:
[…] quite frankly, that's probably a lagging indicator. It's still catching up. We think demand continues to be ahead of that. Primarily driven is the overall desire, demand for the computational components to do AI exceeds the supply picture. And quite frankly, it's refreshing to see. We have a high growth category here […] So this notion of enterprise, our enterprise customer base growing, we've sold to education customers, manufacturing customers, governments. We've sold to financial services, business, engineering and consumer services companies. They're seeing vast deployments, proving out the technology. And some cases are using the tooling of the public cloud. And then they quickly find that they want to run AI on-prem because they want to control their data. They want to secure their data. It's their IP and they want to run domain specific and process specific models to get the outcomes they're looking for.”
Foxconn also stated the AI server market will reach $150 billion by 2027, yet stated it would be due to cloud service providers (CSPs) whereas what Dell is describing is a bit different, as their view is that it will be driven by enterprises.
Following the Q&A, the Citi analyst updated to the following: “Our estimates move higher on higher revenues with slightly lower gross margins offset by tighter operational expenditures. Our estimates assume AI revenues of around $10B by FY26/CY25, and we see upside to $12-15B."
However, this seems low if Dell has a server market share of 21% according to Statista. Dell’s recent investor’s presentation shows a server market share of 31% and “accounts for 43% of new industry revenue over the past 10 years.” Dell also has a 30% market share in storage and “accounts for 38% of new industry revenue over the past five years.” Due to AI revenue being quite speculative at this point (although off to a great start on the sequential growth), it’s likely these estimates are conservative.
Source: Dell’s Investor Presentation
Traditional Server Market & PCs Rebounding (Per Dell):
What is key to our Micron, Broadcom positions and even AMD is the PC rebound as this is when the combination of AI revenue merging with other leading segments will be most evident. The same is true for Dell, and even more so.
According to management, traditional servers will no longer weigh on the company’s revenue in the near-term: “We talked about traditional servers. There's momentum there. Three consecutive quarters of sequential growth and demand. First quarter in a long time of year-over-year demand growth. We exit with good momentum. We tried to reflect that in our guidance. That is in all geographies.”
Since Dell is a major player in PCs, are also noting here comments on when PCs will see a recovery:
“Do I expect the PC market to be bigger in calendar 2024 than 2023? Yes. Do I think the PC market is likely bigger in the second half of 2024 than it is in the first half? Absolutely so. Hence our remarks that we believe the opportunity in PCs is second half driven.”
Dell is a Valuation Story, Like SuperMicro:
Last summer, I made the argument on Fox Business News that integral to our position in SMCI was its valuation, as moving from a commoditized hardware stock to an AI stock would surely boost the valuation from roughly a 1 Fwd PS to something more reflective of an AI stock. About six months later, in January of 2024, SMCI shot up in valuation to 3 Fwd PS.
Therefore, if Dell continues to report more AI revenue, then the company will be on the precipice of challenging its valuation as a commoditized hardware company. To be clear, Dell is not on par with Super Micro in terms of its AI revenue. Dell has 5% AI revenue and SMCI has a whopping 50%, which we called out as a top company in terms of AI revenue in August.
By 2027, if the Citi estimate is correct, Dell would have about 15% of its revenue from AI if we use the $15 billion. If the $30 billion is what materializes (based on Dell’s current server market share of 21% based on a market size of $152B) then there’s potential to reach 31% of revenue from AI by 2027. Both are speculative but also reasonable given Dell’s dominance in servers.
Truly, Dell is a different profile than Super Micro as Dell is a more conservative, blue chip stock and Super Micro is a high-flier that was a small cap less than a year ago. Super Micro has also announced its intent to raise $2 billion from an equity sale compared to Dell’s $836M buyback program this year alone while also offering a rare dividend among tech stocks.
Dell has a net margin of 5.2% and adjusted net margin of 7.2% which is lower than Super Micro’s at 8.1% and 9%, respectively. However, Dell has scale to help offset a lower margin.
On the bottom line, Dell is trading well at a forward PE ratio of 16.7 above its 3-year median at 11.3. However, if/when Dell is re-rated as an AI stock, there is plenty of room as most AI peers are trading at a 40-50 forward PE ratio.
Technical Analysis
By Knox Ridley
There are two scenarios that best fit the price action of Dell. The direction that we break out of the range between $107 and $137 will determine what path we game plan for.
Green – This scenario would have Dell decisively breakout above $137 on expanding volume and in a straight line. This would signal that we are around the halfway mark of a large degree 5 wave pattern. This would be targeting $275 – $395 before the next notable pullback.
Red – This scenario fits well, especially considering the move off the 2022 low is a clean 5 wave pattern. Note that momentum is fading as price is pushing higher. This fits with a coming pullback, which would start a 4th wave toward the $70 region. A decisive move below $107 would likely put a notable top in for Dell, and favor the red scenario.
There has been considerable institution activity above the $107 region. Either this is accumulation for the next leg higher, or it is distribution for the red scenario. This increases the importance of this region.
Conclusion:
The last earnings report showed signs of early shoots for Dell’s AI potential. If enterprise servers are going to see an AI overhaul, then it makes sense that Dell will participate. What we like about Dell is its conservative blue-chip profile, characterized by a company that operates at scale, offers a buyback program and a dividend. This offers some diversification compared to Super Micro’s risk-on profile.
Even though Dell is optimistic about FY25 growth, in large part thanks to AI server growth and an expected uptick in storage, the company expects input costs to increase further in FY25. This is going to weigh on margins, driven by anticipated inflation for component costs as the year progresses. They also anticipate the pricing environment to be more competitive in FY25, further putting pressure on margins to shrink. This will be a strong focus for calls, as it is for Super Micro, as well.
We would love to participate in Dell if the re-rating on valuation comes sooner rather than later. However, we also want to be cautious as the 5% AI revenue is quite low. We are likely to wait for the breakout detailed above instead of front-running this stock as any breakout will still provide plenty of time to capture Dell if it does get a new valuation.
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