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Dell Stock (NYSE:DELL): Still Overpriced Despite Recent Plunge


Hardware, storage and peripherals manufacturer Dell (NYSE: DELL) has become one of the hottest artificial intelligence (AI) stocks on the market today. After the company reported its most recent earnings results in late May, the stock price collapsed by nearly 20% due to the built-up hype and enthusiasm that had built up in Dell’s stock price. Even with the recent sell-off, I’m still inclined to view Dell as a company that’s trading at too expensive a valuation for its business to not be fully AI-driven, so I have a neutral stance on the company.

In this article, I’ll take a closer look at the latest quarterly results to see what’s happening at Dell.

DELL shares have fallen sharply lately, but are still up 81.5% this year.

Dell’s fiscal first quarter 2025 look back

The Round Rock-based company delivered almost everything investors wanted to hear in its most recent quarter. Revenue rose 6.2% annually to $22.2 billion for the period ended May 3, surpassing Wall Street estimates of $21.6 billion. Earnings, excluding certain items, were $1.27 per share, in line with consensus.

Before we get into the details, it’s important to note that Dell operates in two different business segments: the Infrastructure Solutions Group (ISG), which deals with servers, networking and storage, and the personal computing Client Solutions Group (CSG) . Although the latter has faced challenges in recent years, the server business is booming, mainly due to the significant investment in AI spending in this sector.

This was exactly the panorama reported in its recent fiscal 2025 fiscal year earnings. Dell reported Infrastructure Solutions Group (ISG) revenues of $9.2 billion, up 22% year-over-year, with record server and networking revenues of $5.5 billion, up 42%, while Client Solutions Group (CSG) revenue was $12.0 billion, flat year-over-year, while commercial client revenue was $10.2 billion, up just 3 %.

One of the market’s main areas of interest is AI, where Dell has significant growth potential. The company reported that its AI server backlog was $3.8 billion, increasing sequentially by approximately $900 million. In other words, order demand is outpacing Dell’s ability to supply, mainly due to growth in the AI ​​sector.

However, the impact of AI is not just limited to ISG. Another important point that Dell emphasizes is the optimism surrounding CSG. Demand for commercial PCs is expected to improve significantly as the year progresses in a new refresh cycle, driven not only by an emerging Microsoft (NASDAQ:MSFT) Windows refresh cycle, but also due to an expected increase in PC demand as the industry makes great strides in AI-enabled architectures and applications.

Dell’s next steps towards AI

Dell management also highlighted the company’s plans to capitalize on AI in the near term. The company launched the Dell AI Factory, which will help accelerate AI adoption by combining workload-optimized solutions with an open ecosystem for partners like Nvidia (NASDAQ:NVDA) and Meta(NASDAQ:META).

In addition, Dell has improved its direct-to-chip liquid cooling technology with a GPU server that increases energy efficiency by 2.5 times. This innovation is crucial for hyperscaler companies, including leading Big Tech companies in the cloud industry such as Amazon (NASDAQ:AMZN) and alphabet (NASDAQ: GOOGL), who are looking for energy-efficient solutions for their extensive server requirements and expensive GPUs.

By offering more energy-efficient solutions, it becomes possible to reduce costs and improve the performance of the sector. At current levels, Dell stands out as one of the leading alternatives to provide this support and improve the efficiency and profitability of enterprise AI capabilities.

The turning point in the Dell Quarter

Overall, Dell’s reported results were fairly consistent, with some positives to commend. But even when everything seemed to be going well in Round Rock, Texas, there was still one significant issue that the company wanted to communicate to its shareholders: Dell’s guidance regarding its gross margin, which will be dragged down in part by AI- optimized servers .

“Given input cost inflation, the competitive environment and a higher mix of AI-optimized servers, we expect our gross margin to decline by approximately 150 basis points,” Dell’s CFO said during the earnings call.

Although Dell’s management team emphasized its commitment to a disciplined cost structure and expected operating costs to decline by low single digits, around 3% per year, by 2024, this was not enough to reassure investors. As a result, that was the turning point for a major sell-off in Dell’s stock following the earnings call.

Of course, the reasons for Wall Street’s disillusionment with Dell’s results didn’t end there.

The negative response highlights that Dell is priced with very high expectations regarding its AI potential. The shares had risen in value by about 280% over the past 12 months to earnings day. This took the company from a price-to-earnings (P/E) ratio of around 16x in May 2023 to a multiple that stretched beyond 36x at the end of May 2024. Today, the price is at ~28x, reflecting the revaluation based on its AI capabilities.

I still believe Dell is an expensive company relative to its growth because it is not just an AI company. Dell’s AI segment accounts for less than 40% of total revenue. Given this fact and the little to no long-term growth prospects for the rest of the company, I don’t think Dell deserves the premium valuation of roughly double that of its peers.

Is DELL Stock a Buy According to Analysts?

The analyst consensus on DELL is bullish, giving the stock a Strong Buy rating. Dell’s average price target, based on forecasts from twelve Wall Street analysts over the past three months, is $157.15 for the next twelve months. This implies an upside potential of 14.2%.

It comes down to

Dell reported another consistent and promising quarter. However, this was overshadowed by gross margin expectations, which were below market expectations.

We are still in the early days of the rise of AI servers and Dell would do well to establish its presence in this market. However, the company’s shift from a hardware focus to an AI-focused company has led to a high valuation, creating challenges in accurately assessing the extent to which AI will contribute to Dell’s market value.

Given that Dell appears too expensive for a hardware company – and hardware is still its main source of revenue – its current valuation carries a high risk of underperforming expectations of greater profitability growth in AI. That said, I prefer to take a cautious stance and remain neutral on Dell stock.

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