Dell Technologies (DEL -1.68%) may not seem like the most exciting stock in the world. Many investors probably know Dell from a laptop they own or use at work, and this may seem the furthest thing from an exciting artificial intelligence (AI) stock.
However, Dell also has a division within its company that builds data center servers, demand for which has skyrocketed as the AI arms race continues. With another competitor potentially struggling in this area, does this open the door for Dell to gain a significant lead in this area?
Dell could soon generate more sales
One of the biggest names in server infrastructure is Super microcomputer (SMCI -10.36%)who has had some problems. On the company’s side, it has been accused of accounting problems, which prompted a Justice Department investigation and led to its accountant resigning after raising concerns. The company has hired a new auditor, but the damage to the stock has already been done, and investors looking to invest in the infrastructure side of AI may have already committed to investing in Dell.
Additionally, Supermicro is also reportedly having product delivery issues. According to UDN, a Chinese media company, Elon Musk’s xAI startup has moved all server orders from Supermicro to Dell. Although there is no hard evidence for this, it is also consistent with other stories. According to Digitimes Nvidia is moving orders for its new Blackwell chips away from Supermicro.
This battle from an industry leader could allow Dell to gain more market share, making it a viable AI investment.
Dell has two primary divisions
Dell is actually a tale of two companies and not so much a pure server infrastructure play like Supermicro. We’ve already talked about how Infrastructure Solutions Group (ISG) is already benefiting from some AI orders, but could see even more demand if it were to take market share from Supermicro. Dell also has its Client Solutions Group (CSG), which provides the laptops and computers that investors are likely familiar with.
ISG is doing great, with revenue up 38% in the second quarter of fiscal 2025 (ending August 2). Within ISG there are two segments: servers and networking and storage. Storage didn’t do so well, with sales down 5% year over year. However, servers and networks increased by 80%, demonstrating how strong the demand for AI-related computing is today.
CSG, which has struggled in recent years as many laptop and desktop spends were deferred to 2020 and 2021 as people optimized their work-from-home environments, is still struggling with a 4% decline in revenue year over year.
These two divisions represent fairly equal revenue for the company, resulting in total revenue only increasing 9% year over year. However, this may not always be true if the ISG continues to produce excessive growth. This would mean a huge increase in profits as it is much more profitable than the CSG division.
| Division | Turnover 2nd quarter | Q2 Operating result | Operating margin in the second quarter |
|---|---|---|---|
| Infrastructure Solutions Group (in billions) | $11.6 | $1.28 | 11% |
| Client Solutions Group (in billions) | $12.4 | $767 | 6.2% |
Data source: Dell.
Dell’s ISG division is expected to continue growing, which is big news. But is it enough to make it a top AI stock pick? At first glance, Dell stock looks super cheap at 17 times forward earnings.
DELL PE ratio (forward) data according to YCharts
Investors may be tempted to go all in because the S&P500 trades for 24.6 times forward earnings. However, there’s a reason why Dell stock is trading so cheaply. Over the long term, these technology commodity developments tend to be highly cyclical and have rarely delivered long-term market-resistant results. As a result, they trade at a discount to their peers.
However, this time may be different as there is a long-term tailwind driving the massive growth in the ISG sector. Still, with laptop and desktop companies struggling at best, I think investors can do better looking for AI stocks, as there are many attractively priced companies benefiting from the AI tailwind .
Keithen Drury has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
