When it comes to artificial intelligence (AI), the megacap tech firms collectively referred to as the “Magnificent Seven” tend to receive the most attention.
In my opinion, the Magnificent Seven represents big-picture ideas featuring AI. For example, members such as Nvidia, Tesla, and Microsoft can help investors assess how AI is being deployed across data centers, autonomous driving, and cloud computing.
Smart investors understand that there are other opportunities alongside big tech. And it’s these behind-the-scenes players that act as individual threads helping stitch the bigger ideas together.
One opportunity that I would not sleep on is Dell Technologies (NYSE: DELL). While shares have soared 76% so far in 2024, the stock has been beaten down 20% since the company reported earnings on May 30.
Let’s dive into how Dell fits into the broader AI equation and explore why now is an attractive opportunity to buy the dip.
Why is Dell important for AI?
Dell breaks its financial results into two categories: infrastructure solutions group (ISG) and client solutions group (CSG).
CSG is primarily a hardware operation, representing sales of the company’s computers, workstations, and support services. When it comes to AI, investors should keep their eyes on Dell’s ISG performance.
It’s this segment that captures the company’s presence in storage solutions, data center services, and network infrastructure.
How is Dell’s business performing?
This slide is from Dell’s first-quarter fiscal 2025 (ended May 3) earnings presentation.
During the quarter, Dell’s ISG business generated $9.2 billion in revenue — up 22% year over year. Servers and networking revenue soared 42% year over year to $5.5 billion, while revenue from storage solutions remained flat year over year and dropped 16% quarter over quarter.
The drop in storage revenue impacted ISG’s operating margin, which actually dropped 1% year over year to $736 million. However, management tempered expectations by explaining that “Q1 is seasonally our lowest-profitability quarter in ISG, given storage seasonality, and we expect ISG operating margin to improve as the year progresses.”
According to data from IDC, Dell holds more market share in storage systems than its second-, third-, and fourth-largest competitors combined. Furthermore, within the server and networking group, management called out that the company’s PowerEdge XE9680 server is the fastest-growing solution in Dell’s history.
I think these data points undermine Dell’s strong position in the AI realm. However, investors should exercise some patience as long-term secular tailwinds fueling demand trends are still playing out.
Dell’s compelling valuation
The chart illustrates the price-to-earnings (P/E) ratio of Dell benchmarked against a set of peers. The noticeable anomalies from the chart are Super Micro Computer and Arista Networks, which boast P/E multiples over 40.
A prudent strategy is to use dollar-cost averaging when building a position in a stock. While shares of Dell have experienced some momentum, the disparity among valuation multiples pictured here is hard to gloss over.
While Dell’s P/E of 27 isn’t dirt cheap, I think the stock looks like a bargain compared to some of its competitors. Moreover, when it comes to the intersection of IT infrastructure and AI solutions, I think a lot of upside is already priced into Supermicro in particular. For this reason, I see Dell as more of an under-the-radar opportunity.
Now looks like an interesting time to scoop up shares in Dell as the stock experiences a sell-off. I don’t see any reason for the company’s ISG business to come to a screeching halt or experience any unwanted turbulence due to competition. Rather, I think Dell is quietly building a respectable position in the AI landscape and see the company as an emerging leader in the making.
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Adam Spatacco has positions in Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Arista Networks, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Beaten-Down Artificial Intelligence (AI) Stock to Buy Hand Over Fist Right Now was originally published by The Motley Fool
