With its huge opportunity in artificial intelligence, Dell Technologies (NYSE:DELL) is one of the best tech stocks investors can own.
In late May, DELL stock rallied to an all-time high of just under $180 per share on expectations that the company will see exponential growth from sales of its AI servers.
Between January and the start of June, the company’s share price doubled. But over the past month, the stock has declined 16% after Dell’s first-quarter earnings raised concerns about the profitability of the AI servers.
Investors shouldn’t fret. The pullback seen in recent weeks is likely to be a temporary reset before DELL stock again runs higher.
It’s important to remember that we’re still in the early innings of the AI revolution and that Dell should be a long-term beneficiary of the technology shift.
AI Opportunity
Dell is expected to be a huge winner in the AI space. Currently, Dell is building and selling servers that use the newest Nvidia (NASDAQ:NVDA) AI microchips, including the H100 GPU and the Blackwell-generation of chips.
Recently, Elon Musk announced that Dell servers are being purchased to help run a supercomputer at his xAI startup company.
Investment bank Morgan Stanley (NYSE:MS) has forecast $10 billion of AI server revenue from Dell in the company’s current fiscal year that ends in February 2025.
With its most recent financial results, Dell reported that shipments of its AI-optimized servers rose more than 100% sequentially to $1.70 billion.
Dell said that the backlog of orders for its AI servers increased 30% during Q1 to $3.80 billion, and its AI server sales rose 42% to $5.50 billion as demand is strengthening.
Analysts believe concerns over Dell’s AI servers selling at low margins are temporary.
Beyond the servers, Dell’s other business building personal computers and laptops is expected to get a boost in the coming years as new AI features lead to a refresh cycle for the entire PC industry.
Stock Upgrade
In mid-June, Morgan Stanley named Dell stock a “top pick” and said the company’s share price could rise 40% from current levels. The bullish outlook comes after analyst Erik Woodring met with Dell’s management team at the company’s Texas headquarters.
Woodring came away from the meeting believing that Dell’s momentum with AI servers should accelerate in coming quarters.
He reiterated an “overweight” rating on Dell stock and said the share price could reach $200 in coming months. He added in a note to clients that Dell’s personal computer business is “well positioned to outperform the market” with accelerating sales.
His note concluded: “We’d take advantage of recent post-earnings underperformance to ‘buy the dip’ on a leading AI infrastructure player trading at a relative discount to peers.”
Dividend Payments
Beyond its share price appreciation, another reason to like Dell stock is its dividend. Last autumn, management at the company, led by founder Michael Dell, pledged to increase the quarterly distribution to stockholders by 10% a year between now and 2028.
Company executives added that they expect net income to convert to adjusted free cash flow at a rate of 100% or better moving forward.
Furthermore, the company expects to return at least 80% of its free cash flow to shareholders in the form of stock buybacks and dividends, up from a previous commitment to return 50% to 60% of free cash flow.
Dell currently pays a quarterly dividend of 45 cents a share, giving it a yield of 1.28%. Besides steadily increasing its dividend payments, Dell also increased its stock buyback program by $5 billion.
Buy Dell Stock
What’s not to like about Dell Technologies? The company has a massive opportunity in front of it with AI. Its core business of personal computers is headed for a global refresh cycle.
Analysts are pounding the table on the stock. And the company has committed to increasing dividends and share buybacks. With so many catalysts working in its favor, investors should take advantage of the current pullback and buy shares hand over fist. Dell stock is a buy.
On the date of publication, Joel Baglole held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
